US consumer spending rose 0.5 per cent, driven up by higher gas prices; income barely grew

WASHINGTON – Americans boosted their spending in August even though their income barely grew. Much of the spending increase went to pay higher gas prices, which may have forced consumers to cut back elsewhere.

The Commerce Department said Friday that consumer spending rose 0.5 per cent in August from July. It was the biggest jump since February.

Gas prices rose nearly 50 cents per gallon in July and August, but have since levelled off. Excluding the impact of higher gas prices and other price gains, spending ticked up only 0.1 per cent last month.

Income grew only 0.1 per cent, too. But after accounting for inflation and deducting taxes, income actually fell 0.3 per cent — the poorest performance since November.

The increase in prices and slower growth in pay forced people to save less.

“The US personal income and spending data for August are worse than the headline figures suggest and indicate that subdued jobs growth is hitting incomes,” said Paul Dales, a senior U.S. economist at Capital Economics, a research firm. The increase “was largely due to extra spending caused by the surge in gasoline prices.”

High unemployment and weak wage growth have kept Americans from spending more freely, which has held back growth. Consumer spending drives nearly 70 per cent of economic activity.

The economy grew at an annual rate of 1.3 per cent in the April-June quarter, the government reported Thursday. Most economists say growth rate will likely hover around 2 per cent in the July-September quarter, a rate that is far too weak to lower the unemployment rate.

“American household spending and income remain weak, indicating continued subpar growth,” said Sal Gautieri, senior economist at BMO Capital Markets.

The combination of weak income growth and a big jump in spending meant that households saved less. The saving rate dropped to 3.7 per cent of after-tax income in August, down from 4.1 per cent in July.

A price gauge tied to consumer spending jumped 0.4 per cent, reflecting the rise in energy prices. It was the biggest one-month jump since March 2011. Excluding food and energy, prices barely changed. Over the past year, prices excluding food and energy rose only 1.6 per cent, well below the Federal Reserve’s 2 per cent inflation target.

Earlier this month, the government released a mixed report on retail spending that showed that consumers are feeling pinched by higher gas prices.

Consumers spent 0.9 per cent more at retail businesses in August from July. But excluding the impact of gas prices and a sizeable increase in auto sales, retail sales rose just 0.1 per cent. The retail sales report showed Americans cut back on clothing, electronics and at general merchandise outlets.

There have been some positive signs that spending could pick up in September, most notably a pair of positive consumer confidence surveys released this week.

The University of Michigan’s index released Friday showed consumer sentiment rose this month to its second-highest level in nearly five years. A separate survey from the Conference Board said consumer confidence jumped in September to its highest level since February.

Stock prices are higher. Steady gains in home prices, along with record-low mortgage rates, have helped fuel a modest recovery in the housing market.

And a report Thursday offered some hope that the job market will strengthen. Weekly applications for unemployment benefits plunged 26,000 to a seasonally adjusted 359,000. That’s the lowest level in two months.

Still, most economists expect only modest hiring gains when the government releases the September employment report next week. The forecast is that employers added roughly 100,000 jobs, about the same as in August.