US Spending Rebounds, Good News for Growth
U.S. consumer spending rebounded sharply in July, the government said on Monday, erasing the disappointment of June and bolstering hopes that the U.S. economy has recovered from its recent soft spot.
The bond market took heart from the mild inflation assessment contained in the report, although the dollar gave up initial gains despite the implications for stronger third quarter U.S. growth and further Federal Reserve interest rate hikes.
Personal spending rose 0.8 percent, more than making up for a revised 0.2 percent fall in June, the Commerce Department said. The improvement in consumption was actually even larger since June's spending had been initially reported as a 0.7 percent decline.
But personal income advanced at a more modest pace than expected, posting a 0.1 percent rise compared with a 0.2 percent gain the previous month and July's advance was the weakest reading since November 2002.
"Consumption is about what we had anticipated, which is obviously good news. Spending has rebounded. I'm surprised personal income increases were so modest," said Tim O'Neill, chief economist at BMO Financial in Toronto.
Analysts polled by Reuters had forecast consumption to rise 0.7 percent and income to gain 0.5 percent after strong retail and car sales last month indicated that consumers had overcome their reticence of June.
That is good news for third-quarter growth, after a slowdown in the economy's expansion in the second quarter, but the very tepid improvement in incomes made economists wonder about spending in the future.
"Consumers are spending, but we really do need some better job growth to keep income growing at a pace that will keep the economy going," Joel Naroff at Naroff Economic Advisers wrote in a note to clients.
Stripping out the effects of inflation and taxes, disposable income rose 0.1 percent, Commerce said.
In striking evidence that U.S. inflation is well under control, both the price index for consumer purchases and core prices, one of the Federal Reserve's favorite measures of inflation, were unchanged last month. Year-on-year, core prices were up just 1.5 percent.
"The inflation data look good. There is no inflation acceleration," said Robert Brusca, chief economist at Fact and Opinion Economics.
The 10-year U.S. government bond rallied solidly on the news, with prices rising by 12/32 and lowering yields to 4.18 percent from 4.23 percent on Friday.
Spending on durable goods, which include costly items like cars, jumped 4.1 percent, erasing June's revised 3.2 percent drop. This had been initially reported as a 5.9 percent fall.
Non-durable goods spending advanced 0.2 percent and June's previously reported 0.3 percent decline was revised to show a 0.2 percent rise.
A rebound in spending had been heralded by a pick-up in both car and retail sales last month and analysts see this laying the foundation for higher growth in the second half of the year after the economy hit a rut between April and June.
Second-quarter gross domestic product growth shrank to 2.8 percent from 4.5 percent in the previous three months after soaring oil prices dented household incomes and took the shine off shopping.
Last week's retreat in U.S. crude prices from record highs near $50 per barrel has boosted confidence in the U.S. expansion, as has the fact that second-quarter GDP was held back by net trade earnings while domestic demand picked up.
But economists have remained wary after retail giant Wal-Mart Stores Inc (NYSE:WMT - News) lowered its August sales forecast due to disappointing back-to-school demand and they will scrutinize August auto sales, out on Wednesday, for evidence households have kept up spending.
They will also be watching August's employment report on Friday, which is forecast to show 160,000 new jobs were created after the meager 32,000 posted in July.
A recovery in employment is crucial to underpinning U.S. growth as tax rebates dry up and the Fed continues its strategy of raising interest rates at a measured pace.
"Obviously you can't continue to get that kind of spending growth if you don't see some income growth. The key is what's going to happen in the labor market, so we'll just have to wait and see," said O'Neill.
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