Consumer Spending, Inflation Rose in July

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, August 30, 2008

Consumers spent more and got less for the second month in a row, according to data released yesterday by the U.S. Commerce Department, as inflation gnawed away at people's pocketbooks and disposable income dropped.

In current dollars, consumer spending rose 0.2 percent in July compared with the previous month, but that gain was more than wiped out when adjusted for inflation, to a decline of 0.4 percent. The fall was even more dramatic than in June, when inflation-adjusted spending decreased by 0.1 percent.

The figures suggested that the effects of the recent government stimulus package were waning. As part of that package, rebate checks were sent to consumers starting in April and ending in mid-July. But nearly half of the checks -- $48.1 billion -- were delivered in May.

"Once the rebates are history, it's hard to see where consumers' buying power comes from," said Jared Bernstein, a senior economist at the Economic Policy Institute, noting that the job market is "not delivering much in terms of wages and income."

Personal income fell 0.7 percent in July, while disposable income dipped 1.1 percent in current dollars and 1.7 percent in real dollars, according to the new data. The federal government distributed $13.7 billion in stimulus payments last month -- half of the amount dispersed in June -- reducing the decline in disposable income by $170.3 billion.

Consumer spending is a crucial component of the economy, accounting for roughly 70 percent of the gross domestic product. But shoppers have shown little interest in pulling out their wallets as they continue to confront high gas prices, falling home values and tightened credit markets.

Many have socked away their stimulus checks in savings accounts and are unlikely to dip into the cookie jar now, said Brian A. Bethune, chief U.S. financial economist for Global Insight.

"The consumer is slowing down," said Peter Morici, an economist at the University of Maryland. "It's quite consistent with what we're seeing in retail sales data."

Retailers have been struggling to lure in tight-fisted customers this summer, and several large national chains, including Steve & Barry's and Mervyns, have been forced to file for bankruptcy protection. July retail sales were down 0.1 percent compared with the previous month, with significant declines in auto sales. Yesterday, the Commerce Department reported that the slowdown in automotive purchases accounted for most of the drop in real consumer spending.

This week, Toyota cut its annual sales forecast by nearly 7 percent as fuel prices and the sputtering economy weakened demand for its larger cars and SUVs -- the latest sign of distress in the auto industry. Carmakers are now beginning aggressive promotions to clear this year's stock, which could provide a much-needed boost to spending. J.P. Morgan Chase is expecting a 5 percent to 6 percent boost in light vehicle sales this month, according to a research note released yesterday.

"A resuscitation . . . rides heavily on how successful these incentives prove to be in August and September," Bethune said.

Meanwhile, the Reuters/University of Michigan consumer sentiment index, a measure of consumer confidence, rose slightly to 63 this month, from 61.2 in July. Although the August figure was the highest in five months, it was relatively low in the long run. The index was at 83.4 in August 2007.

Yesterday's gloomy news comes on the heels of Thursday's surprisingly upbeat report that the GDP rose 3.3 percent in the second quarter of the year, the fastest rate since mid-2007. The growth, which covers April to June, was driven by a 13 percent surge in exports.

The U.S. dollar, however, has been gaining and is likely to push down exports in the coming months. Europe, a major consumer of U.S. goods, is battling its own economic downturn.

Analysts expect that weak domestic demand will continue through the end of the year and into 2009. Morici said he expects the recovery to begin in the second quarter of 2009 as incomes and housing starts slowly rise.

"We shouldn't be terribly alarmed that this had happened," he said. "As business cycles go, this is mild."

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