11 August 2009

June economic report: Americans spending more

As gasoline prices rose, Americans spent more in June than the previous month, despite falling incomes.

Consumer spending accounts for about 70% of total economic activity and has helped lift the economy out of previous recessions. While analysts expect the economy to grow in the second half of this year, this time around consumers are not likely to lead the way.

Americans boosted their spending 0.4% in June, the Commerce Department said, the second consecutive monthly increase. But adjusting for inflation, spending fell 0.1%, following a flat reading in May. Inflation-adjusted spending has not increased since February, the department said.

Personal income, meanwhile, dropped 1.3% in June, the eighth straight decline and steepest fall in four years. Incomes were up in May due to one-time payments from the Obama administration’s stimulus program. But wages and salaries also fell 0.4% in June.

“The key message is that ... income remains weak” and consumers are likely to keep saving more, said Paul Dales, U.S. economist at Capital Economics, in a note to clients. “Under those circumstances, we expect spending to remain muted for some time.”

Consumer spending may increase in July and August due to the government’s “cash-for-clunkers” program, economists said, but will likely level off afterward. The program has spurred thousands of Americans to trade in old cars for newer vehicles.

“When given sufficient incentive, as in cash-for-clunkers, consumers will spend,” said Nigel Gault, chief U.S. economist for consulting firm IHS Global Insight. “But reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers.”

The government reported the overall economy, as measured by the GDP, shrank at an annual rate of 1% in the second quarter, less severe than the 6.4% decline in the first quarter and a 5.4% decline in the fourth quarter of 2008.

For related information, go to www.isa.org/productivity.