Consumers put the brakes on spending while personal income plunged in July, the Commerce Department said Friday, as the effect of rebate checks faded and inflation sapped buying power.
Personal income fell 0.7%, worse than expected and the biggest drop since Hurricane Katrina hit. Real disposable income, the amount of money Americans have to spend after taxes, declined 1.7%.
Consumer spending rose 0.2%, in line with views. But spending declined 0.4% after adjusting for inflation, which was the weakest since June 2004.
"A large portion of rebate checks was eaten up by higher prices at the grocery store or siphoned away by higher prices at the gas pump," said Mark Vitner, a Wachovia senior analyst. "With the rebates behind us, consumer spending is poised for a major slowdown."
Stocks fell on the report and
Spending on nondurable goods was flat. Outlays on services, which account for nearly 60% of total purchases, grew 1.2%.
Households heavily cut back on big ticket items such as cars and furniture. Spending on durable goods fell 1.5% in July after a decline of 1.4% the month before.
Given that most of the decline in durable goods spending came from auto sales, it was surprising that a gauge of business activity in the Chicago area actually jumped in August.
The Chicago PMI rose to 57.9 from 50.8, the best showing in more than a year. Subindexes for new orders, output and backlogs also jumped. But jobs weakened further and price pressures mellowed.
Despite job losses, wage and salary gains have held up, rising 0.3%.
Personal savings totaled 1.2% in July as a large portion of the stimulus checks wound up in savings accounts, said Brian Bethune, chief U.S. economist at Global Insight.
"The sluggish spending indicates that consumers are reluctant to tap into those accounts under current economic conditions," he said.
Economists fear the economy will stumble in coming months as consumer spending -- accounting for 70% of economic activity -- continues to wane now that rebate checks have run their course and inflation continues to linger.
The Commerce Dept. report's inflation gauge jumped 0.6% in July, pushing the yearly gain to 4.5%, the highest since February 1991.
The core PCE deflator, excluding energy and food costs, rose 0.3%. The Fed's favorite inflation gauge increased 2.4% vs. a year earlier, above the central bank's comfort zone of 1% to 2%.
"Inflation has eaten into consumers' spending power and we are looking for a clear slowdown in the economy," Bethune said. "A big drop in the price of oil in August could offer some relief."
Meanwhile, investors charted the path of Hurricane Gustav as it heads toward the Gulf of Mexico and its oil rigs and refineries.
Wall Street's retreat following the downbeat news about consumers also comes after several days of sizable gains in stocks and on the final session before the long Labor Day weekend. Pre-holiday trading is generally light and some pullback was to be expected.
Still, investors were uneasy after the Commerce Department reported that personal incomes fell by 0.7 percent in July — well beyond the drop of 0.1 percent that analysts polled by Thomson/IFR had predicted.
As expected, the government also said consumer spending rose a modest 0.2 percent. That was below the 0.6 percent increase seen in June and, accounting for rising prices, spending fell by 0.4 percent in July. Wall Street has been concerned about Americans' ability to help the economy grow, as high prices for gas and food have strapped many household budgets.
"My biggest concern with the income data is that we're getting off to a weak start to the third quarter," said Robert Dye, senior economist at PNC Financial Services Group. "The income numbers are a reminder that the economy is going to look worse before it gets better."
The Dow fell 171.63, or 1.47 percent, to 11,543.55. The blue chips began trading Friday having logged a three-day advance of nearly 330 points.
Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 17.85, or 1.37 percent, to 1,282.83. The Nasdaq fell 44.12, or 1.83 percent, to 2,367.52.
The week's trading was again marked by volatility. After tumbling Monday on worries about the credit markets and finishing mixed Tuesday, stocks rose Wednesday and Thursday.
Those moves perhaps belied the quiet surrounding some trading posts. While readings on the overall economy as well as consumer confidence and demand for big-ticket manufactured goods were better than expected, trading was light all week. This prompted some observers to dismiss the market's moves as aberrations.
Declining issues outnumbered advancers Friday by nearly 2 to 1 on the New York Stock Exchange, where volume came to a weak 959.1 million shares compared with 956.2 million shares traded Thursday.
For the week, Dow fell 1 percent, the S&P 500 lost 1.18 percent and the Nasdaq fell 3.47 percent. And in August, the Dow rose 1.45 percent, the S&P 500 gained 1.22 percent and the Nasdaq added 1.80 percent.
Bond prices fell Friday. The 10-year note's yield, which moves opposite its price, rose to 3.83 percent from 3.79 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 13 cents to $115.46 per barrel on the New York Mercantile Exchange. While oil trading has been orderly as Gustav progresses, there is concern about damage from the storm or a disruption in the flow of gasoline and other fuel from Gulf Coast refineries.
Although many investors are fixated on consumers, Wall Street showed little reaction to the Reuters/University of Michigan's index of consumer sentiment, which rose to its highest level in five months. Economists often reason that consumers who are upbeat about their prospects are more likely to spend.
Also, investors shrugged off the Chicago Purchasing Managers' index, which measures business conditions across Illinois, Michigan and Indiana. It jumped to 57.9 from 50.8 in July. The index is considered a precursor to the Institute for Supply Management's manufacturing survey on Tuesday. Investors also will be looking next week to readings on the service sector, construction, factory orders and employment.
"Traditionally September is a weak month for stocks and I don't think we're going to escape that," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc., looking to the coming week. "I do think we are going to stay in a trading range. I don't see this market falling out of bed and going below the July lows."
But concerns that arose Friday could remain next week. Investors worried about the tech sector after Dell's report late Thursday and its cautious comments about spending in the sector. The stock fell $3.48, or 14 percent, to $21.73.
Another tech name, Marvell Technology Group Ltd., fell after its third-quarter revenue forecast fell short of Wall Street's estimate. The stock lost 65 cents, or 4.4 percent, to $14.11.
Government-chartered Fannie Mae and Freddie Mac fell anew Friday after big gains earlier in the week. Fannie Mae fell $1.11, or 14 percent, to $6.84, while Freddie Mac fell 77 cents, or 15 percent, to $4.51.
The Russell 2000 index of smaller companies fell 8.29, or 1.11 percent, to 739.50.
In Tokyo, the Nikkei index rose 2.39 percent. In Europe, London's FTSE-100 index rose 0.63 percent, Frankfurt's DAX rose 0.03 percent and the CAC-40 index in Paris rose 0.47 percent.
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U.S. stocks tumbled on Friday, led
lower by tech shares after
companies worldwide are cutting back on technology spending.
Nevertheless, the market managed to end August in positive
territory as oil continued a sharp slide started in July.
On Friday, all three major indexes fell more than 1
percent, with the Nasdaq chalking up the biggest losses after
Dell Inc's comments sparked fears about weakness in the whole
tech sector. Shares of
computer maker, fell nearly 14 percent, and other tech shares
such as International Business Machines Corp, also declined.
All 30 stocks in the Dow industrials finished in the red on
Economic data added to the market's jitters ahead of the
long Labor Day weekend. A government report showed U.S.
personal income fell unexpectedly in July while spending slowed
as the effects of a government stimulus package wore off. An
inflation measure hit a 17-year high.
"The market is just very fragile. There's not a lot of
support going into the Labor Day weekend," said Gary Wolfer,
senior portfolio manager at Univest Wealth Management & Trust
in Souderton, Pennsylvania. "The Dell news has compounded the
downside move. When you have a non-financial company missing
its earnings, that's disconcerting to the market."
The Dow Jones industrial average was down 171.47 points, or
1.46 percent, at 11,543.71. The Standard & Poor's 500 Index was
down 17.93 points, or 1.38 percent, at 1,282.75. The Nasdaq
Composite Index was down 44.12 points, or 1.83 percent, at
For the month, though, the Dow added 1.5 percent, while the
S&P rose 1.3 percent and the Nasdaq gained 1.8 percent.
The U.S. bond market closed early on Friday ahead of the
Labor Day holiday, contributing to thin trading volume.
Chipmakers further pressured the Nasdaq after diversified
semiconductor company Marvell Technology Group Ltd gave a
conservative outlook for the third quarter.
Oil settled down 13 cents at $115.46 per barrel even as
energy companies began shutting output in the Gulf of Mexico as
Hurricane Gustav approached the region. Earlier, oil had surged
The pullback was not enough to lift equities, though,
particularly the troubled tech sector. Shares of Marvell
Technology, whose chips are used in Apple's iPhone and Research
In Motion Ltd's BlackBerry, fell 4.4 percent to $14.11. The
company said it is still unsure of the impact of a weakening
An index of semiconductor stocks fell 2.8 percent, while an
index of retail stocks dropped 1.1 percent.
Dell shares fell 13.8 percent to $21.73 after its spending
warning. Earlier this week, the company reported a surprisingly
steep fall in quarterly profit.
IBM shares dropped 2.3 percent to $121.73.
There were some bright spots among the economic data,
however. Business activity in the U.S. Midwest expanded
strongly in August as new orders jumped, the Institute for
Supply Management-Chicago business barometer showed, even as
the rate of hiring plummeted to a four-month low.
The Reuters/University of Michigan report on consumer
sentiment, meanwhile, showed confidence recovered somewhat from
depressed levels, helped by moderating gasoline prices.
Trading volume was light on the New York Stock Exchange,
with about 915 million shares changing hands, well below last
year's estimated daily average of roughly 1.90 billion. On
Nasdaq, about 1.56 billion shares traded, also below last
year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by about 1.7 to
1 while on the Nasdaq, advancers beat decliners by about 1.8 to
(Additional reporting by Kristina Cooke; Editing by Leslie