Consumers Complain, but Keep on Spending

Data for July showed robust gains in expenditures, keeping the economy on track. The savings rate crept further into negative territory

U.S. consumers' moods may have dampened, according to recent surveys, but that doesn't appear to have made a significant impact on their spending. According to a government report released Aug. 31, personal consumption expenditures (PCE) jumped 0.8% in July. The other headline figure in the report showed a 0.5% rise in personal income for the month.

These monthly gains were in line with economists' expectations. Neither June's original 0.4% PCE increase nor the 0.6% income gains were revised, though the underlying "real" trajectory (i.e., adjusted for inflation) entering the third quarter was bumped up.


  Elsewhere in the report, consumption of durable goods jumped 1.6%, nondurables rose 1.0%, and services increased 0.6%. The report's inflation component, the PCE price index, rose 0.3% and the core index (excluding food and energy) rose 0.1%, which left the year-over-year figures showing respective gains of 3.4% and 2.4%. This left real consumption rising 0.5%.

The solid income and consumption figures through July continue to buck forecasts of a broad slowdown in the U.S. economy, though a modest softening in growth remains a "best guess". We at Action Economics have bumped up our third quarter real consumption growth forecast to 3.8%, and our gross domestic product estimate for the quarter to 3.2%.

Note that our fourth-quarter over fourth-quarter real GDP estimate for 2006 is 3.7%, which is exactly equal to the average GDP gain over the last 13 quarters. Though we think the economy is indeed posting a modest slowdown, the pullback only looks dramatic when compared with the outsized 5.7% GDP surge in the first quarter.


  Similar to the GDP report, the data also revealed notable upward revisions to first-quarter income. These revisions, combined with the upward bumps to the income data a few months ago, leave a combined set of upward adjustments that are similar to those seen last year, and right in line with what we warned would happen as we transitioned from the first quarter to the second—though the release of these revisions was a bit late in coming.

A second year of record bonus payments and solid underlying growth in production through the period boosted income by more than was appreciated at the time. And it drove the big tax receipt figures, that remain robust through the most recent reports. Corporate profits are also soaring at an even more impressive rate, but the mix between corporate and personal income growth is now proving a bit less divergent.


  One other noteworthy component of the July report: The savings rate decreased to -0.9%, vs. -0.7% in the prior month. The steady and unwavering downtrend in the personal savings rate through July should be of particular note to economists, who persist in assuming that this rate will quickly rebound over the near term. This constant downtrend, aside from the hurricane-led distortions last August and September, has proven impervious to the trials and tribulations of the various consumer confidence surveys.

Though the surveys have noted monthly ups and downs in consumer emotions, the savings rate has shown that actual spending is painfully insensitive to the current events that have driven news headlines through this expansion. We see little reason the robust gain in confidence measures in July, and the bigger than expected plunge in August, will prove any different.

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