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Cooler Spending in U.S. Signals Slow Start for Quarter: Economy

Photographer: Ty Wright/Bloomberg

Stronger property values are helping bolster household purchases of appliances and automobiles even in the face of rising mortgage rates, supporting home improvement retailers such as Lowe’s Cos. and Home Depot Inc. Close

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Photographer: Ty Wright/Bloomberg

Stronger property values are helping bolster household purchases of appliances and automobiles even in the face of rising mortgage rates, supporting home improvement retailers such as Lowe’s Cos. and Home Depot Inc.

Consumer spending cooled in July as income growth slowed, indicating the world’s largest economy was off to a slow start in the third quarter.

Purchases rose 0.1 percent after a 0.6 percent June gain that was larger than previously estimated, according to Commerce Department data issued today in Washington. Other reports showed business activity picked up this month and consumer sentiment declined less than projected from July’s six-year high.

Gains in incomes are barely keeping pace with inflation, a sign employment will need to pick up for the expansion to strengthen. At the same time, rising home values are helping bolster household purchases of appliances and automobiles even in the face of rising mortgage rates, prompting Ford Motor Co. (F) to project sales this month will be the strongest since 2007.

It’s “an incrementally positive story,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York, whose firm is the second-best consumer spending forecaster for the past two years, according to data compiled by Bloomberg. “We’ve seen a very, very weak July, but the data that we have in hand for August suggest that we’re going to see a pretty significant rebound.”

Stocks fell, with the Standard & Poor’s 500 Index headed for its worst month since May 2012, on the smaller-than-forecast gain in consumer spending and the prospects for a strike against Syria. The S&P 500 declined 0.3 percent to 1,633.37 at 12:50 p.m. in New York.

More Orders

Companies received more orders this month, helping to propel the Chicago Business Barometer (CHPMINDX) up to 53, matching forecasts, after a reading of 52.3 in July, another report today showed. Numbers greater than 50 signal expansion. The Chicago group includes goods producers and service providers with operations in the U.S. and abroad, making the gauge a measure of total growth.

“The regional surveys continue to suggest that we’ve got some momentum,” said Oubina. Economists at RBC Capital Markets this week lowered their tracking estimate of the third-quarter gain in gross domestic product to 2 percent from 2.5 percent at the end of last week, reflecting the slowdown in consumer spending and the bigger-than-projected drop in orders for durable goods reported by the Commerce Department on Aug. 26.

The economy grew at a 2.5 percent pace in the second quarter, stronger than the 1.7 percent previously estimated, figures from the Commerce Department showed yesterday. The improvement reflected bigger gains in exports.

Global Growth

That may be a signal the global growth is stabilizing. Economic confidence in the euro area soared to a two-year high in August as the currency bloc’s recovery gathered pace after it exited a record-long recession, figures from the European Commission in Brussels showed today.

Confidence among American consumers wasn’t as weak this month as previously projected, according to another report today. The Thomson Reuters/University of Michigan final index of consumer sentiment for this month fell to 82.1, a four-month low, from 85.1 in July, which was the highest since July 2007. Economists in a Bloomberg survey called for 80.5, according to the median projection, after a preliminary reading of 80 issued earlier this month.

The improvement from the previous reading for the month was centered in the survey’s current conditions index, which takes stock of Americans’ views of their personal finances. The gauge declined to 95.2 in August from 98.6 last month, also a six-year high. The preliminary August figure was 91.

Spending Outlook

“When I look at the confidence numbers, I see the case for spending doing better in the second half of the year,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, and the top forecaster of the sentiment gauge for the past two years, according to data compiled by Bloomberg. “The backdrop in terms of the labor market looks fairly encouraging. The spending number was a little weaker than expected, but I think the weight of evidence on the consumer is that, if anything, fundamentals are improving.”

The median forecast of 74 economists surveyed by Bloomberg projected consumer spending, which accounts for about 70 percent of the economy, would rise 0.3 percent in July. Estimates ranged from no change to a 0.5 percent increase. The June reading previously was reported as a gain of 0.5 percent.

Incomes (PITLCHNG) increased 0.1 percent in July compared with a 0.3 percent gain the previous month, the Commerce Department figures also showed today. The survey median called for incomes to gain 0.2 percent. Earnings after taxes climbed 2.2 percent last month from July 2012.

Inflation Data

The gain was just enough to keep ahead of inflation. The Commerce Department’s price index tied to spending, a gauge tracked by Federal Reserve policy makers, increased 1.4 percent in July from the same period in 2012. It rose 1.3 percent in the previous 12 months.

Adjusting consumer spending for inflation, purchases were unchanged in July compared with a 0.2 percent increase the previous month, according to today’s report. A drop in outlays for services, including a reduction in electricity use, held back the reading.

Dearborn, Michigan-based Ford is among companies predicting sales picked up this month. The auto industry’s seasonally adjusted annualized sales rate for August may climb to about 16 million cars and light trucks, Erich Merkle, Ford’s U.S. sales analyst, said this week. The monthly pace last exceeded that level in November 2007, according to researcher LMC Automotive.

Auto Workers

Chief Executive Officer Alan Mulally is hiring almost 6,500 new workers this year in the U.S., where Ford is the second largest automaker and leads the industry in market share growth through 2013’s first seven months. The Fusion model is challenging Toyota Motor Corp.’s Camry as the nation’s top-selling car while selling at an average premium of more than $2,300 per vehicle.

Faster job gains would help drive the wage increases needed to boost household purchases. Employers probably added 180,000 jobs in August, according to the Bloomberg survey median ahead of the Sept. 6 report from the Labor Department. Hiring gains averaged 197,500 a month in the first six months of this year, up from 180,000 in the second half of 2012.

Higher home prices, which have boosted household net worth, are propelling demand for washers, dryers and other expensive items that Americans were reluctant to buy in the housing downturn, Lowe’s Chief Executive Officer Robert Niblock said last week.

“Our second-quarter sales performance exceeded our expectations, due in part to strong demand for appliances and recovery in our garden department,” Carol B. Tome, chief financial officer at Atlanta-based Home Depot, said on an Aug. 20 earnings call.

To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net

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

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