Weak income curbs U.S. consumer spending in August
8:50 AM, E.T. | September 30, 2011U.S.
U.S. consumers struggled to make ends meet in August as incomes fell for the first time in nearly two years, while a surge in Midwest manufacturing this month provided one bright spot in an otherwise weak economy.
Income slipped 0.1 percent, the Commerce Department said on Friday, the first decline since October 2009 and contrasted with economists' expectations for a 0.1-percent advance.
That held consumer spending to a 0.2-percent rise after increasing 0.7 percent in July. Adjusted for inflation, spending was unchanged after a 0.4-percent gain in July.
But the sting from the weak income report was softened by the solid factory activity in the Midwest in September and news that consumers grew more optimistic as the month ended.
The Institute for Supply Management-Chicago said its business barometer rose to 60.4 from 56.5 in August. Economists had expected it to decline to 55.5. A reading above 50 indicates expansion in the regional economy.
"It is good that our economy is maybe not in a tailspin into recession just yet," said Paul Larson, chief equities strategist at Morningstar in Chicago. Larson and many other analysts, however, noted that Europe's debt crisis still posed a significant risk to the economy.
Consumer spending accounts for about 70 percent of U.S. economic activity, so the flat inflation-adjusted reading for spending added to a picture of shaky GDP growth.
"It seems very unlikely that consumers can lead the economy to a faster recovery pace. The consumer needs job growth," said John Ryding, chief economist at RDQ Economics in New York.
"Higher inflation continues to hurt consumers as price increases outstrip gains in wage incomes."
SENTIMENT PROVIDES HOPE
But there is hope that spending will pick up in the months ahead after consumer confidence improved this month.
The Thomson Reuters/University of Michigan's final September reading of the overall index on consumer sentiment stood at 59.4, up from 57.8 earlier this month.
Economists had expected no change from the initial September reading. The index finished at 55.7 in August.
There was also good news in the Chicago ISM, with a gauge of employment jumping to 60.6 from 52.1 in August.
The nation's employment growth ground to a halt in August, and the jobless rate stayed at a lofty 9.1 percent, eroding consumers' buying power. The September payrolls report is due next Friday.
Last month, private wages and salaries dropped $12.2 billion after increasing $23.8 billion US in July.
A deepening gloom is taking hold in financial markets as investors worry that with no quick end to the European debt crisis in sight, the global economic slowdown will worsen.
Despite the rise in the Chicago ISM, some manufacturers are retrenching.
Industrial conglomerate Ingersoll Rand Plc was the latest, cutting its third-quarter and full-year earnings forecast to below market estimates, citing weak demand at its key North American residential and commercial markets for security technology.
Consumer spending growth slowed sharply to a 0.7-percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.
Overall economic growth rose at a 1.3-percent rate in the second quarter after expanding only 0.4 percent in the January-March period.
Last month, disposable income was unchanged for the first time since September, but when adjusted for inflation fell 0.3 percent, the largest drop since October 2009.
With real disposable income weak, savings fell to an annual rate of $519.3 billion, the smallest since December 2009, from $550.5 billion in July. The savings rate dropped to 4.5 percent, also the lowest since December 2009.
The report showed a moderation in inflation pressures on a monthly basis. The personal consumption expenditures price (PCE) index rose 0.2 percent after increasing 0.4 percent in July.
Compared to August last year, the index was up 2.9 percent, the largest increase since October 2008, after advancing 2.8 percent in July.
The core PCE index -- excluding food and energy - rose 0.1 percent after gaining 0.2 percent the prior month.
The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through August after rising by the same margin in July.
The Fed would like to see it close to 2 percent.
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