WASHINGTON – U.S. consumers barely increased their spending in July as their income grew more slowly, held back in part by steep government spending cuts that reduced federal workers’ salaries. The tepid gains suggest economic growth is off to a weak start in the July-September quarter.
The Commerce Department said Friday that consumer spending rose just 0.1 per cent in July from the previous month. That’s slower than June’s 0.6 per cent increase. Consumers cut their spending on long-lasting manufactured goods, such as cars and appliances. Spending on services was unchanged.
Income rose 0.1 per cent in July following a 0.3 per cent June gain. Overall wages and salaries tumbled $21.8 billion from June — a third of the decline came from forced furloughs of federal workers.
Consumers’ spending drives roughly 70 per cent of economic activity. The weak spending report led some economists to sound a more pessimistic note about economic growth in the current July-September quarter. It follows July data showing steep drops in orders for long-lasting manufactured goods and new-home sales.
“This is a disappointing report on a number of levels,” said James Marple, senior economist at TD Economics. “Prospects for a pickup in economic growth in the third quarter hinge on a broad-based acceleration in spending by households and business to offset the ongoing drag from government. The data for the first month of the quarter are not following this script.”
Several analysts said that economic growth is unlikely to match the 2.5 per cent annual rate reported Thursday for the April-June quarter. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7 per cent rate for April through June.
Marple predicts third-quarter growth will fall around 2 per cent, perhaps even lower.
The Federal Reserve will consider the consumer spending and income data at its September meeting, when it decides whether to begin slowing its $85 billion a month in bond purchases. The bond purchases have helped keep long-term borrowing rates low.
But the most critical factor that the Fed will weigh is the August employment report, which will be released next Friday. It’s the final jobs report before the Fed meets.
Another concern is that rising interest rates could dampen consumer spending, particularly on homes and cars. Mortgage rates have already risen more than a full percentage point since May.
In July, the savings rate was unchanged at 4.4 per cent of after-tax income. That was the smallest since the rate had been 4.3 per cent in March.
The small rise in spending was driven by a 0.8 per cent gain in purchases of nondurable goods, such as clothing. Purchases of durable goods such as autos fell 0.2 per cent and purchases of services such as utilities and doctor’s visits were unchanged in July.
A price gauge tied to consumer spending was up a small 0.1 per cent in July compared to June. Prices excluding volatile food and energy are up just 1.4 per cent compared to a year ago, significantly below the Federal Reserve’s 2 per cent target for inflation.