Personal income tumbled unexpectedly
in July and inflation-adjusted spending shrank as government
economic stimulus waned, but consumer spirits rose this month,
a hint the economy may muddle through its woes.
Personal income fell 0.7 percent in July, the sharpest
decline since a 2.3 percent plunge in August 2005, when
Hurricane Katrina hit, the Commerce Department said on Friday.
Analysts were expecting income to hold steady.
A big jump in prices in July pushed inflation to a 17-year
high, eroding what little spending power consumers had.
Consumer spending, which accounts for about two-thirds of
economic activity, rose 0.2 percent as expected, the slimmest
gain since February, and inflation-adjusted spending fell 0.4
percent, the biggest drop since June 2004 and the second
straight monthly decline.
Consumer confidence hit its highest in five months in
August, however, posting an unexpectedly large recovery from
depressed levels with the help of moderating energy prices.
The Reuters/University of Michigan Surveys of Consumers
said its final index of confidence for August rose to 63.0, its
highest since March, from 61.2 in July. Still, for a record
third straight month, a majority of consumers said their
financial situation had worsened.
"Consumers are certainly worried about the job and housing
markets but lower gasoline prices have given them some tangible
relief and we are seeing that relief expressed in the various
consumer confidence figures," said Lynn Reaser, chief economist
at Bank of America Capital Management in Boston.
The unexpectedly weak income and spending data combined
with a jump in oil prices and disappointing earnings to drive
stock prices down. In late morning, the blue chip Dow Jones
industrial average (.DJI) was off about 1 percent.
Prices for U.S. government debt, which react negatively to
inflation, moved lower, while the dollar gained versus the euro
but slipped against the yen.
STIMULUS FADING
"With the tax refund effect on spending now more or less
over, we think the worst is yet to come for consumers," said
Ian Shepherdson, an economist with High Frequency Economics in
Valhalla, New York.
The government issued $13.7 billion stimulus checks to U.S.
households last month -- about half of the amount sent out in
June. By the end of July, $90 billion had been delivered as
part of the effort to put an extra $107 billion in consumers'
hands this year.
Consumer prices rose a sharp 0.6 percent last month,
pushing the year-on-year rise in the personal consumption
expenditures price index up to 4.5 percent, the highest since
February 1991.
Much of the increase was due to fast rising food and energy
prices. But even with those costs stripped out, prices gained
0.3 percent from June and were up 2.4 percent over the past
year, the biggest annual gain since February 2007.
Other reports showed business activity in the Midwest was
mixed in August, while New York City's economy shrank for a
third straight month.
The Institute for Supply Management-Chicago business
barometer surged well beyond expectations in August as
production and new orders jumped, but the rate of hiring
plummeted to a four-month low.
Business activity in the Milwaukee, Wisconsin, region
contracted for the sixth straight month, hit by a drop in new
orders, the ISM-Milwaukee said.
Separately, the National Association of Purchasing
Management-New York said its index of current business
conditions rose to 45.3 in August from 38.5 in July.
While fast-rising food and energy prices have taken a big
toll on U.S. consumers and businesses, a big drop in the price
of oil since a record high reached last month could soon offer
a wave of relief.
(Additional reporting by Burton Frierson and Pedro Nicolaci
da Costa in New York and Ros Krasny in Chicago; Editing by Neil
Stempleman)
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