American consumers increased their spending twice as fast as their income rose last month, keeping the national savings rate near a record low and creating the impression of an economy that refuses to slow down.
But economists dug into the numbers and concluded just the opposite, saying the seeming acceleration in July was actually just a month-to-month glitch in a broader trend that indicates that economic growth is beginning to decelerate.
Personal income, which includes wages, interest and government benefits, rose 0.2 percent in July, while personal spending raced ahead at 0.4 percent, the Commerce Department reported.
With consumers spending more than they made, the nation's savings rate stayed in negative territory at minus 1.4 percent, just a tick better than the all-time low of minus 1.5 percent, which was reached in May.
Economists noted that while July's 0.4 percent gain in consumer spending was higher than June's 0.3 percent increase, it was lower than every month from January through May. Economists monitor this number closely because consumer spending accounts for some two-thirds of all economic activity, and it has been the key propellant in the ongoing economic boom.
Spending has cooled noticeably this year, from a sizzling 6.7 percent increase in the January-March quarter to a less spectacular but still robust 4.6 percent in the April-June quarter. Economists said the July number suggests a further cool-off in the July-September quarter to about 3.5 percent.
What made yesterday's numbers appear troubling was the gap between spending and income, but again, economists said that was not what it appeared to be.
The anemic 0.2 percent rise in personal income in July was much slower than the 0.7 percent increase in June. But much of that slowdown came from a huge swing in disaster relief payments to farmers, which were up sharply in June and down just as sharply in July. Absent that, economists said, income growth would have been roughly double what it was, and the income and spending numbers would have been much closer.
Based on the raw numbers, "it looks like consumers are going on a spending rampage," said Gordon Richards, an economist with the National Association of Manufacturers. "But if you take that anomaly in farm numbers into account, then spending is rising only a little more than income." Some economists said their calculations showed that with the impact of the increased farm subsidies removed, income rose faster than spending.
Economists remained somewhat concerned about the negative savings rate, a phenomenon they attribute to the "wealth effect"--the willingness of consumers to raid their savings or use their credit cards because their burgeoning stock portfolios or increased home values make them feel wealthy enough to do so.
But if spending continues to decelerate and income rebounds to higher levels--as most economists expect--the savings rate should stabilize or inch closer to positive territory.
For the time being, many economists see smooth sailing. With the economy continuing to generate large numbers of jobs, and wages rising moderately, income growth will be "stable to accelerating," said William Dudley, chief economist for Goldman Sachs Group Inc.
"That's certainly one reason why any slowdown in the economy is going to be a modest slowdown rather than a sharp slowdown--because consumers have support for their spending," Dudley said.
What has changed is the forces that drove consumer spending unusually high. "The consumer really benefited from a number of stimulative things earlier in the year," said James K. Glassman, senior U.S. economist for Chase Securities Inc. Elements included tax-law changes that sharply boosted refunds, a booming stock market and three-quarter-point interest-rate cuts last fall by the Federal Reserve.
But "those special factors are starting to wind down," Glassman said. More recently, the Fed raised short-term rates by a quarter-point in June and another quarter-point Tuesday to cool off the economy and prevent a rise in inflation.