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Increase in spending lessens recession fears

Report suggests rebound in July, economists say

In July, consumer spending was up 0.8 percent, the most in five months, as personal incomes grew slightly. Consumer spending accounts for 70 percent of US economic activity. In July, consumer spending was up 0.8 percent, the most in five months, as personal incomes grew slightly. Consumer spending accounts for 70 percent of US economic activity. (Kevork Djansezian/Getty Images)
By Martin Crutsinger
Associated Press / August 30, 2011

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WASHINGTON - Consumer spending grew in July by 0.8 percent, the largest amount in five months. That followed a decline in June and helped ease fears that the US economy is on the verge of another recession.

Americans bought more cars and spent more last month to cool their homes during a heat wave.

Personal incomes increased 0.3 percent last month, the Commerce Department said. That’s slightly higher than the modest 0.2 percent in June, the weakest growth in seven months.

The first look at spending in the second half of the year helped give Wall Street a lift. The Dow Jones industrial average rose more than 254 points, or 2.3 percent. The rise in spending added to positive reports that Hurricane Irene did not do as much damage as had been feared.

Economists said the spending report was a strong sign the economy rebounded in July after growing at an annual rate of just 0.7 percent in the first half of the year, the slowest pace since the recession officially ended two years ago.

Consumer spending accounts for about 70 percent of US economic activity.

July’s spending and income figures “significantly alter the outlook for third-quarter GDP growth,’’ said Paul Dales, a senior US economist for Capital Economics. Dales said growth for the July-September quarter is on track for an annual rate of 2.5 percent, up from his previous estimate of 1.5 percent.

Dales noted that the report measured spending ahead of a sell-off on Wall Street in late July and early August, which may force consumers and business to pull back on spending and investment. The stock market has lost 11 percent of its value since July 21.

But even if the early August data are weak, talk of another recession “would seem strange’’ when the economy appears to be growing more strongly, Dales said.

The economy added 117,000 net jobs in July, twice the number added in each of the previous two months. Spending on retail goods rose faster last month than in any month since March. US automakers rebounded last month to boost factory production by the most since the Japan crisis.

In July, consumer spending rose at a faster pace than income. That means Americans saved less. The savings rate fell to a four-month low of 5 percent, down from 5.5 percent in June.

The increase in spending was led by a 1.9 percent jump in purchases of durable goods, products such as autos and appliances that are expected to last at least three years. Spending on nondurable goods rose 0.7 percent.

The purchase of services, the biggest spending category, rose 0.7 percent. Much of the increase was because of a jump in electricity use. Many Americans kept their air conditioners running in July to combat a heat wave in most parts of the country.