August 31, 2013 in Business

Tepid consumer spending suggests weaker growth

Buying of durable goods drops 0.2 percent in July
Martin Crutsinger Associated Press
 
Less optimism

WASHINGTON – A measure of U.S. consumer confidence slipped this month from a six-year high in July, as Americans expressed less optimism about the coming months.

The University of Michigan says its final reading of consumer sentiment dropped to 82.1 in August from 85.1 in the previous month. Americans said they were less confident that the job market will improve but more confident that their income will rise.

Even with the decline, the index is nearly 8 points higher than a year ago. That suggests consumer spending could pick up later this year.

A separate report Friday showed that consumer spending barely increased in July as income growth slowed. Consumers drive roughly 70 percent of economic activity.

WASHINGTON – U.S. consumers barely increased their spending in July as their income grew more slowly, held back in part by steep government spending cuts that reduced federal workers’ salaries. The tepid gains suggest economic growth is off to a weak start in the July-September quarter.

The Commerce Department said Friday that consumer spending rose just 0.1 percent in July from the previous month. That’s slower than June’s 0.6 percent increase. Consumers cut their spending on long-lasting manufactured goods, such as cars and appliances. Spending on services was unchanged.

Income rose 0.1 percent in July following a 0.3 percent June gain. Overall wages and salaries tumbled $21.8 billion from June – a third of the decline came from forced furloughs of federal workers.

Consumer spending drives roughly 70 percent of economic activity. The weak spending report led some economists to sound a more pessimistic note about economic growth in the current July-September quarter. It follows July data showing steep drops in orders for long-lasting manufactured goods and new-home sales.

“This is a disappointing report on a number of levels,” said James Marple, senior economist at TD Economics. “Prospects for a pickup in economic growth in the third quarter hinge on a broad-based acceleration in spending by households and business to offset the ongoing drag from government. The data for the first month of the quarter are not following this script.”

Several analysts said economic growth is unlikely to match the 2.5 percent annual rate reported Thursday for the April-June quarter. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7 percent rate for April through June.

Marple predicts third-quarter growth will fall to around 2 percent, perhaps even lower.

The Federal Reserve will consider the consumer spending and income data at its September meeting, when it decides whether to begin slowing its $85 billion-a-month in bond purchases. The bond purchases have helped keep long-term borrowing rates low.

But the most critical factor that the Fed will weigh is the August employment report, which will be released next Friday. It’s the final jobs report before the Fed meets.

Another concern is that rising interest rates could dampen consumer spending, particularly on homes and cars. Mortgage rates have already risen more than a full percentage point since May.

In July, the savings rate was unchanged at 4.4 percent of after-tax income. That was the smallest since the rate had been 4.3 percent in March.

The small rise in spending was driven by a 0.8 percent gain in purchases of nondurable goods, such as clothing. Purchases of durable goods such as autos fell 0.2 percent and purchases of services such as utilities and doctor’s visits were unchanged in July.

© Copyright 2013 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email