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U.S. Economy: Consumer Spending Climbs as Incomes Lag

Consumer Spending in U.S. Rises More Than Forecast
Disposable incomes dropped for the first time since January after adjusting for inflation. Photographer: Andrew Harrer/Bloomberg

Consumer spending in the U.S. rose more than forecast in July, exceeding gains in incomes and indicating the economy may avoid slipping back into a recession.

Purchases rose 0.4 percent, the most since March, after little change the prior month, Commerce Department figures showed today in Washington. Incomes climbed 0.2 percent, less than projected, and the savings rate dropped.

Disposable incomes, or the money left over after taxes, dropped for the first time since January after adjusting for inflation, showing how the lack of jobs may prevent spending from strengthening. Companies from Intel Corp. to J. Crew Group Inc. are cutting forecasts as unemployment and flagging confidence prompt households to scale back.

“It’ll be a real slog,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “We’ll see very slow growth, but it’s a far cry from a double dip,” he said, referring to the economy lapsing into another economic slump.

Concern over the shortfall in incomes sent stocks lower, and Treasury securities climbed. The Standard & Poor’s 500 Index fell 1.5 percent to 1,048.92 at the 4 p.m. close in New York. The yield on the benchmark 10-year Treasury note dropped to 2.52 percent from 2.65 percent late on Aug. 27.

The median estimate of economists surveyed by Bloomberg News called for a 0.3 percent advance in spending. The 71 projections ranged from unchanged to an increase of 0.5 percent.

Economists forecast incomes would also rise 0.3 percent, following no change in June, according to the survey.

Income Breakdown

Wages and salaries increased 0.3 percent, propelled by a longer workweek. Inflation-adjusted incomes after taxes fell 0.1 percent last month after a 0.1 percent June increase, and the savings rate dropped to 5.9 percent from 6.2 percent.

Today’s report also showed inflation accelerated. The price gauge tied to spending patterns increased 1.5 percent from July 2009, compared with a 1.4 percent gain in the 12 months ended in June.

The Federal Reserve’s preferred price measure, which excludes food and fuel, rose 0.1 percent in July from the prior month and was up 1.4 percent from a year earlier, matching the median forecast of economists surveyed.

Adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending rose 0.2 percent after a 0.1 percent increase in July. The advance reflected an increase in purchases of automobiles.

Auto Demand

Autos sold at an 11.6 million pace last month, up from an 11.2 million rate in June, according to industry figures. The gain extended a see-saw pattern over the past four months that shows demand is stagnating.

Dearborn, Michigan-based Ford Motor Co. has no plans to increase production of any of its current models because demand is fragile in the weak economic recovery, George Pipas, the automaker’s sales analyst, said in an interview this month

J. Crew, the New York-based retailer of sportswear, casual and career clothing, last week lowered its full-year earnings forecast.

“The continued economic uncertainty we’re seeing is leading us to take a more conservative outlook for the second half of the year,” Mickey Drexler, the retailer’s chief executive officer, said on a conference call.

Bernanke’s Outlook

Fed Chairman Ben S. Bernanke last week said the central bank “will do all that it can” to ensure a continuation of the economic recovery, and outlined steps it might take if growth slows.

“Consumer spending may continue to grow relatively slowly in the near term,” he said Aug. 27 at the Kansas City Fed’s annual monetary policy symposium in Jackson Hole, Wyoming.

The U.S. economy expanded at a 1.6 percent annual rate in the second quarter, according to revised figures from the Commerce Department released Aug. 27. Corporate profits grew at the slowest rate in a year, employee wages were revised lower and consumer spending rose at a 2 percent annual rate.

Companies created 51,000 jobs on average from May through July, down from 200,000 in the prior two months, according to Labor Department data. The jobless rate may climb to 9.6 percent this month from 9.5 percent in July, and private payrolls increased by 46,000 workers, according to the median forecast of economists surveyed by Bloomberg before a Labor Department report on Sept. 3.

November Elections

The economy is a top issue for voters in the November congressional elections and polls show the public is increasingly skeptical of President Barack Obama’s performance. Public approval for the president’s handling of the economy was at 41 percent in an Aug. 11-16 Associated Press-GfK survey, an all-time low and down from 50 percent last July.

Obama today said his economic advisers will examine “additional measures” to promote hiring and growth and urged Senate Republicans to drop their “blockade” of a measure to help small businesses.

Economists have reduced their forecasts for third quarter growth over recent weeks as reports showed business spending weakening and home sales continuing to slide. Mark Zandi, chief economist at Moody’s Analytics Inc., last week said the likelihood of the economy slipping back into a recession is now 33 percent, up from a 20 percent chance 12 weeks ago.

The gain in spending “is allaying near-term double-dip concerns,” said Derek Holt, an economist at Scotia Capital Inc. in Toronto. “It nonetheless showcases very lackluster growth in the U.S. economy.”

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