Americans Spend More, But Incomes Fail To Keep Pace

By SCOTT STODDARD, INVESTOR'S BUSINESS DAILY



American consumers are down, but not out, as government data showed spending increased at a modest pace in July despite high unemployment, weak income growth and uncertainty about the economic outlook.

Personal spending climbed 0.4% in July, the most in four months, on increased outlays for cars and other durable goods, the Commerce Department said Monday. Wall Street had forecast a slightly smaller 0.3% gain after June's flat reading. Spending was up 3.4% compared to a year ago.

The increase in spending, while modest, provided some welcome relief. A recent raft of weaker-than-expected economic news, including slumping housing sales and continued high jobless claims, fueled worries the economy could backslide into recession as government stimulus wanes.

"It's consistent with sluggish growth in the near term, but not a double dip (recession)," said Scott Brown, chief economist at Raymond James.

July's spending gains may be hard to maintain if jobs and incomes don't pick up, analysts said. Incomes rose 0.2% from June to July, Commerce said, pushing the savings rate down to 5.9% from June's one-year high of 6.2%.

"With consumers as strapped as they are that (spending outpacing incomes) can't last," said Bruce McCain, head of investment strategy at Key Private Bank.

Real disposable income, or income after taxes, fell 0.1%, the first decline since January.

Economists expect the Labor Department will report Friday that employers cut 120,000 payroll jobs in August as the government shed temporary census workers. Private employers likely added a modest 44,000 staff. The unemployment rate is seen edging up to 9.6%.

The weak labor market and slack wage growth is weighing on consumers, which account for 70% of economic activity.

"We need to see better job growth, and the numbers in the near term are probably going to be pretty soft," Brown said.

President Obama, whose various stimulus efforts are nearing an end, called on Senate Republicans to "drop the blockade" against an aid package for small businesses — the economy's biggest job creators — when Congress returns from summer recess.

Obama pledged added measures to bolster the fragile recovery, which may include increasing investment in clean energy, tax cuts aimed at saving jobs and additional highway-repair projects.

"My economic team is hard at work identifying additional measures that could make a difference in both promoting growth and hiring," he said.

The government said Friday that the economy grew at a tepid 1.6% annual pace in the second quarter, well below the 2.4% pace it initially estimated. Downward revisions to trade and inventory figures outweighed an upward revision to consumer spending.

Federal Reserve head Ben Bernanke said Friday that the central bank stands ready to take further steps to boost the economy if the recovery flags.