'Clunkers' Lifts Consumer Spending

But Stagnant Family Incomes Are Likely to Slow Recovery

The "Cash for Clunkers" trade-in program, which gave consumers a subsidy to turn in older vehicles for new, fuel-efficient models, boosted consumer spending in July, the Commerce Department reported Friday, but household income was flat, making it likely those gains will be short-lived.

Consumer spending drives much of the economy, and the new data suggested people are willing to spend if given the right incentives.

Personal consumption expenditures, adjusted for inflation, rose 0.2 percent in July, roughly in line with analysts' expectations. That was down slightly from the 0.6 percent increase posted in June.

Purchases of motor vehicles and parts more than accounted for the increase in July and accounted for most of the increase in June, the report said.

Outside of motor vehicles, spending on nondurable goods such as cosmetics, cleaning products and fuel fell, and spending on services was largely flat, inching up 0.1 percent.

Cash for Clunkers, which lasted from late July until Monday, is expected to boost consumer expenditures for August as well. The White House Council of Economic Advisers estimated Monday that the program helped sell nearly 700,000 cars and will boost the gross domestic product in the third quarter by 0.3 to 0.4 percentage points.

Auto industry analysts and dealers, however, are bracing for sales volumes to fall in September and worry that the program brought in customers who would have bought later in the year.

"The reality is that clunker cash is ultimately an unsustainable fuel source for consumer spending," Richard Moody, chief economist for Forward Capital, said Friday in a research note.

To further stimulate spending, the federal government is working out the details of a similar program to start later this year that would allow consumers to purchase more energy-efficient appliances. Supporters hope it might prove to be a boon for appliance makers, which have been hurt by the fall in demand caused by the housing downturn, the tightening of credit and the pullback in consumer spending. Whirlpool announced Friday that it will close its refrigerator factory in Evansville, Ind., and cut 1,100 jobs. It plans to move some production to Mexico.

Whether spending will increase likely depends on income growth. The Commerce data showed private wages and salary disbursements edged up slightly for the first time since September. But some analysts questioned whether it was a one-time blip.

Friday's two reports did little to move Wall Street. U.S. stock markets closed mixed after a day of light but volatile trading. The Dow Jones industrial average was down 36.43 points, or 0.4 percent, to close at 9544.20. The S&P 500-stock index declined 2.05 points, or 0.2 percent, to close at 1028.93, while the technology-laden Nasdaq composite index gained 1.04 points, or 0.05 percent, to close at 2028.77.

Overall, personal income rose less than 0.1 percent. With inflation at low levels, real disposable income fell only 0.1 percent, after falling 1.6 percent in June due to an increase in gasoline prices. The savings rate edged down for a second straight month to 4.2 percent from 4.5 percent in June.

June's and July's income and spending data suffered from comparisons to May, when tax credits and a one-time boost in Social Security payments included in the $787 billion stimulus bill rolled into bank accounts. Consumers initially held onto that money, pushing the savings rate up to 6 percent.

"Rising unemployment and slowing wage growth have continued to take their toll," Capital Economics economist Paul Dales said in a note to clients. "The fiscal stimulus that boosted disposable incomes in the spring is now fading."

Consumer sentiment has lifted in recent weeks as talk of the end of the recession has increased. The Reuters/University of Michigan Surveys of Consumers said its final Index of Consumer Sentiment for August was higher than a reading at the start of the month. But it slipped compared to July, from 66 to 65.7, and is now at a four-month low.

"Consumers remain a missing link in hopes for strong recovery," Global Insight economist Nigel Gault said in a research note.