Consumer Spending, Wages, Cooled in August

Consumer spending slowed in August as incomes dropped for the first time in almost two years, showing scarce jobs are preventing the U.S. economy from gaining ground.

Purchases rose 0.2 percent after a 0.7 percent increase the prior month, and earnings decreased 0.1 percent, according to Commerce Department figures today in Washington. Other reports indicated business activity unexpectedly accelerated this month, while consumer sentiment held near an almost three-year low.

Little hiring, stagnant wages and a plunge in stocks have shaken confidence in the recovery that began two years ago, which may hurt sales at retailers like Best Buy Co. and Target Corp. (TGT) The sputtering economy has prompted policy makers from President Barack Obama to the Federal Reserve to take additional action in a bid to prevent another recession.

“Consumer spending is still obviously quite weak,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Income looks pretty weak and that needs to turn around if we’re going to see growth improve. The economy is holding in,” he said. “It’s hard to say it’s accelerating, but it’s not contracting either.”

Stocks fell, extending the biggest quarterly drop since 2008 for the Standard & Poor’s 500 Index, after reports from China and Germany fueled concerns the global economy is slowing. The S&P 500 dropped 1 percent to 1,149.01 at 11:29 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 1.94 percent from 2 percent late yesterday.

Surprise Acceleration

The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 60.4 this month from 56.5 in August. A level of 50 is the dividing line between expansion and contraction. Economists forecast the gauge would drop to 55, according to the median estimate in a Bloomberg News survey.

Manufacturers like Emerson Electric Co. (EMR) are counting on growing sales to China and other emerging countries to buffer them from slowing domestic demand. While announcing more unconventional measures to boost growth, the Fed last week said U.S. business investment continued to expand.

“There is still lingering support from exports,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “These regional surveys can be very volatile. Some of it in recent months is the automotive rebound.”

Also today, the Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 59.4 this month from a reading of 55.7 in August that was the lowest since November 2008.

Survey Results

The gain in consumer spending last month matched the median estimate of 81 economists surveyed by Bloomberg. Projections ranged from decreases of 0.2 percent to increases of 0.4 percent. The Commerce Department revised the July spending figure from a previously reported 0.8 percent gain.

Income dropped for the first time since October 2009. Economists forecast earnings would rise 0.1 percent, according to the Bloomberg survey. Wages and salaries dropped 0.2 percent last month, the first decrease since November.

The loss of income forced American households to tap into their nest eggs to sustain spending. The savings rate dropped to 4.5 percent in August, the lowest level since December 2009, from 4.7 percent the prior month.

The report’s price index rose 0.2 percent in August from the prior month, showing the gain in so-called nominal spending was wiped away after taking inflation into account.

Inflation Measures

The Fed’s preferred price gauge, which excludes food and fuel costs, rose 0.1 percent in August from the prior month, the smallest increase since March and less than the 0.2 percent median forecast of economists surveyed. It was up 1.6 percent over the past 12 months, the same as in July.

Employment was unchanged last month, the worst reading since September 2010, and the jobless rate held at 9.1 percent, the Labor Department said Sept. 2. The report also showed average hourly earnings fell for the first time in more than three years, further stressing consumers’ incomes.

Retailers like Best Buy and Target said battered consumer confidence has strained demand.

“The consumer is making very measured choices,” Best Buy Chief Executive Officer Brian Dunn said in a telephone interview on Sept. 13 after the Richfield, Minnesota-based company reported a 30 percent decline in second-quarter profit . “I don’t think it’s a year where someone is going to buy a TV and a tablet and a new smartphone and go to Disneyland.”

The Bloomberg Consumer Comfort Index slumped last week to the second-lowest level on record, according to the report released yesterday. The comfort gauge reached similar readings of minus 53 three times in the first half of 2009, when the economy was in the recession. It fell to its all-time low of minus 54 in November 2008 and January 2009.

Stocks Tumble

Confidence has been partly sacked by weakness in stock market. The S&P 500 Index (SPX) in September is heading toward its fifth monthly loss, the longest falling streak since March 2008.

Obama has been traveling the country this week to promote his $447 billion job creation plan. Speaking in Denver on Sept. 27, the president said the nation needs to reset its priorities to assure future growth.

Fed officials announced a plan last week to replace some notes in their portfolio with longer-term Treasuries to further reduce borrowing costs.

To contact the reporters on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.