Consumer Spending and Personal Incomes Both Weak
August 3, 2010 - 11:23 AMConsumers did not boost their spending in June and their incomes failed to increase, further evidence that the economic recovery slowed in the spring. And Americans saved at the highest rate in nearly a year.
Personal spending was unchanged in June, the Commerce Department reported Tuesday. It was the third straight month of lackluster consumer demand. Incomes were also flat, the weakest showing in nine months.
The disappointing report on spending and income was among a raft of data released Tuesday that confirmed the economy ended the April-to-June quarter on a weak note.
Factory orders dropped 1.2 percent in June to a seasonally adjusted $406.4 billion, the Commerce Department said. It was the second consecutive decline after nine straight months of gains. Lower demand for steel, construction machinery and aircraft dragged down the figure.
And the number of buyers who signed contracts to purchase homes fell in June. The National Association of Realtors says its seasonally adjusted index of sales agreements for previously occupied homes dipped 2.6 percent to a reading of 75.7. That was the lowest on records dating back to 2001 and down nearly 19 percent from the same month a year earlier.
Last week the government said economic growth for the second quarter slowed to 2.4 percent. Many analysts believe it will dip further in the second half of the year as high unemployment, shaky consumer confidence and renewed troubles in housing weigh on the year-old economic recovery.
The personal savings rate rose to 6.4 percent of after-tax incomes in June, the highest reading in nearly a year. The savings rate is now about three times the 2.1 percent average for all of 2007, before the recession began.
While income growth was flat in June, incomes did post solid gains in April and May. But households chose to save the extra money rather than spend it. Higher savings restrain spending in the near term. But the extra resources allow households to repair their tattered balance sheets.
"It is of some comfort that households now appear to have something of a cushion that can be used to pay down debt or support spending," said Paul Dales, U.S. economist at Capital Economics.
Consumer spending is closely monitored because it accounts for 70 percent of total economic activity.
The government reported last week that the overall economy, as measured by the gross domestic product, slowed to an annual growth rate of just 2.4 percent in the April-to-June quarter. That was down from 3.7 percent growth in the first three months of the year and a 5 percent spurt in activity in the fourth quarter of last year.
The slowdown reflected the decline in consumer spending, which rose at an annual rate of 1.6 percent in the second quarter compared to a 1.9 percent pace in the first quarter.
Economists are worried that the financial troubles weighing on households could cause spending to ebb even more in the second half of the year. The sub-par economic growth, just about half the pace normally seen coming out of a deep recession, has made little headway in reducing the 9.5 percent unemployment rate.
The zero reading on income growth was weaker than the 0.2 percent increase economists had expected. It followed a 0.3 percent rise in May and was the poorest showing since incomes were also flat in September. Part of the weakness in June reflected a decline in the number of temporary census workers, which subtracted $3.4 billion from federal payrolls at an annual rate. A spurt in census hiring in May had boosted government payrolls.
The zero reading on consumer spending was also slightly weaker than economists had forecast. It followed a small 0.1 percent rise in May and a 0.1 percent decline in April.
The weak economy is keeping a lid on inflation. A price gauge tied to consumer spending dropped by 0.1 percent in June. Prices are up just 1.4 percent over the past 12 months, well within the Federal Reserve's comfort zone for inflation.
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