Consumer spending was flat in August even though incomes rose, the Commerce Department reported yesterday, providing more mixed signals about the economy's recent strength.
A plunge in auto sales was largely to blame for a sharp drop in consumer spending on big-ticket, long-lasting items, analysts said. That offset increased consumer spending on services and many other goods, the report showed.
"Consumers are still mired in a soft patch," said Sung Won Sohn, chief economist for Wells Fargo Bank, using Federal Reserve Chairman Alan Greenspan's term for the recent slowdown in overall U.S. economic growth.
Personal income, meanwhile, rose 0.4 percent in August, following gains of 0.2 percent in each of the previous two months. The category includes income from wages and salaries, interest, rents, dividends and other sources.
Consumer spending accounts for about two-thirds of U.S. economic activity; therefore, it is closely watched as a barometer of the economy's overall health. It has fluctuated widely in recent months, for reasons that analysts do not entirely understand, making it difficult for them to gauge and predict the economy's growth. After adjusting for inflation, consumer spending was flat in April, rose solidly in May, plunged in June, rose by a strong 1.1 percent in July and was unchanged in August.
"Spending should be going up at a faster rate than we are seeing," given recent growth in income, interest rates that are still near historic lows and other factors, Sohn said.
Historically, spending growth has followed income growth very closely, he said. "What we are seeing is really an abnormal situation."
Greenspan and other economists have attributed much of the June drop in consumer spending to the surge in energy prices in May. It probably also reflected the lack of any gain in June in incomes once adjusted for inflation and taxes, said some analysts, who say they are now puzzled as to why spending didn't rise with income in August.
Monthly auto sales are partly to blame, swinging considerably since spring. They fell in June when dealers tried to trim rebates and other financial incentives, popped up in July when the incentives were restored, but then tumbled in August despite sweetened incentives and other promotional efforts.
Consumers may be holding back somewhat because of anxieties about terrorism threats, high oil prices, rising interest rates, job security and perhaps even uncertainty about the upcoming presidential election, Sohn said, noting recent declines in two popular measures of consumer confidence.
Meanwhile, the economy appears to be on track to grow at a solid pace in coming months, many analysts predict, in large part because businesses appear to be regaining confidence, boosting hiring and increasing their spending on plants, equipment and inventories.
"Businesses are not in a soft patch, and are in a position to pick up the slack," Sohn said. "Whether consumers come out of the soft patch depends on [those anxieties] fading."
Some economists said that even without such worries, many consumers may be restrained from spending more in coming months by large debts, low savings and rising energy bills.
Consumers are spending nearly all their after-tax income, the report showed. The savings rate in August was 0.9 percent, up from 0.5 percent in July, but still near historic lows.
"If gasoline and heating oil prices continue to rise, or if there is any other significant external shock, consumers could well postpone spending while they pay down debt and rebuild savings," said Charles W. McMillion, president of MBG Information Services, an economic research firm in Washington. "This would cause the economic slowdown to worsen, perhaps sharply."
The Commerce Department's report noted some effects from Hurricane Charley. Rental and some other incomes were reduced by about $11 billion, annualized, to reflect the estimated uninsured losses of residential and business property. But income was boosted by about $12.5 billion, annualized, because of insurance payments.