Consumer spending up despite flat income

United States consumers kept up their strong spending in July 2002, taking advantage of renewed financing incentives to buy vehicles, even as income growth stalled, a government report showed.

The Commerce Department said personal spending surged 1.0% in July, its biggest gain since October 2001.

The gain was propelled by a 3.7% advance in spending on durable goods. That was also the biggest monthly gain since October, when automakers first put in place no-interest finance deals to jump-start sales in the aftermath of the September 11 attacks on New York NY and Washington DC.

Income growth in July was unchanged after June's revised 0.7% gain. Without steady income gains, it will be difficult for consumers to maintain July's pace of spending. Economists watch consumer spending closely as it makes up two-thirds of economic activity.

“The income number is very important because income will drive spending going forward,” said Lynn Reaser, chief economist, Banc of America Capital Management, St Louis MO.

“Job and wage growth will remain the driver of spending going forward. But a continued pace of spending faster than income growth is not sustainable,” she added.

Wall Street analysts had projected income to rise by 0.2% and spending to be up 0.7%.

July's income reading was the weakest since November 2001, when it was also flat. Wages and salaries, the biggest source of income growth, fell 0.2%, the first drop since April.

The spending boom pinched consumers' savings, driving the personal saving rate down to 3.4% of disposable income. That's the lowest since December 2001 and shows consumers — despite this summer's revelations of corporate boardroom scandals and stock woes — remained confident enough to spend at a faster rate than wage gains.

The report also showed inflationary pressures remained tame in the month. The price index for personal consumption expenditures rose 0.2% in July after a 0.1% gain in June.

Excluding volatile food and energy prices, the gauge was up 0.1% for a second straight month.

Economic growth slowed in the second quarter, with the pace of growth slumping to a 1.1% annual rate from the first quarter's 5.0% rate. Growth is expected to perk up in the current quarter, but a lackluster job market has raised some concerns about the possibility of a “double-dip” slide into recession after 2001's mild downturn.

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