Incomes drop sharply in July while spending slows
WASHINGTON - Consumer spending slowed to a crawl and personal incomes plunged in July, reflecting the waning impact of $93 billion in economic stimulus payments.
The Commerce Department report Friday showed that consumer activity got off to a shaky start in the third quarter, raising new worries that the economy could falter in coming months due to rising unemployment, a continuing credit crisis and the deepest housing slump in decades.
Personal incomes fell by a bigger-than-expected 0.7 percent in July, the biggest drop in nearly three years, while consumer spending edged up a modest 0.2 percent, just one-third the 0.6 percent gain in June.
The report showed that the June and July spending figures were skewed by a huge jump in inflation during the period. An inflation gauge tied to consumer spending rose over the past 12 months by 4.5 percent, the biggest price jump in 17 years, led by higher costs for energy and food. Without the big jump in prices, consumer spending would have actually fallen by 0.4 percent last month after dropping 0.1 percent in June, underscoring just how weak current activity is.
"Consumers pulled back on real spending in both June and July in the face of weak employment conditions, higher energy prices and further declines in household net worth," said Brian Bethune, chief U.S. economist at Global Insight, a Lexington, Mass., forecasting firm.
The government reported Thursday that the overall economy, as measured by the gross domestic product, rose by 3.3 percent in the April-June quarter, a significant rebound from growth of just 0.9 percent in the first quarter, and an actual decline of 0.2 percent in the final three months of last year.
The second-quarter rebound reflected strong growth in exports and the impact of the stimulus payments, which the Treasury Department reported Friday now total $93.4 billion through the end of August. However, the mass mailings of the payments ended in mid-July with only small batches expected to be sent out over the next few months.
Economists worry that with the stimulus payments fading quickly, consumer spending, which accounts for two-thirds of economic activity, also will falter in coming months.
Bethune said he expected overall GDP would slow to just a 1 percent growth rate in the current July-September quarter and will actually turn negative in the fourth quarter.
Even that 1 percent GDP forecast could be too high if automakers' efforts to boost lagging sales by offering attractive rebates in coming weeks are unsuccessful because of all the headwinds facing consumers, including higher tighter lending standards by banks struggling with billions of dollars of losses on bad mortgage loans, he said.
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