Two Month Grind for Consumer Spending

Consumer spending suffered a two-month grind as income declined and the impact of inflation continues to pull prices up, the Commerce Department declared Friday.

Weak Domestic Spending

A 0.4 percent dip in spending was posted in July following the 0.1 percent drop recorded a month earlier.  According to John Ryding of RDQ Economics, the decline in consumer spending will likely spill over in the third quarter.  The stimulus of growth which has been observed in the past months appears to be temporary, notwithstanding the fact that the GDP grew by 3.3 percent.

Personal real income dropped by 0.7 percent in July, an improvement from the dismal 2.7 percent personal income level decrease recorded in June.  Figures showed that the disposable income of US consumers also declined by 1.7 percent in July.  The disposable income level measures how American consumers spend their money after deducting taxes.

Stocks reacted negatively to these figures as the Dow Jones recorded a 1.47 percent decline of the industrial average and Standard & Poor’s and Nasdaq declined by 1.37 percent and 1.83 percent respectively.  

Left on Their Own

Tax rebate checks also weaned in July after the initial hand offs were given in May and June.  According to Joseph Brusuelas of Merk Mutual Funds, the consumers will be left on their own as tax cuts and fiscal incentives will be absent for the rest of year.  

The Federal Reserve also closely watched the core personal consumption index as it registered a 0.3 percent increase, matching the inflation figure recorded in June.  The PCE is an important indicator of inflation behavior.

There is no indication that the Fed will increase the interest rates even though the figures for inflation are relatively high.  In a recent speech, Fed Chairman Ben Bernanke gave no assurance that rates will be cut especially after world energy prices went down in the past week.

According to Nigel Gault of Global Insight, the Fed will not likely to intervene and raise rates as they view that inflation can be brought down by the slowing economy and the decline in commodity prices.  Economic indicators released recently strengthened this view.

Car sales suffered the biggest decline as durable goods posted a 1.6 percent drop in July following a 1.4 percent decrease in June.  However, even energy and food consumption and other non-durable goods showed a 0.9 percent drop in sales at the end of July.
Exports: Redeeming the US Economy

The American export sector becomes the counter balance for the entire economy as demands for US durable goods rose 1.3% in July.  Overseas exports clearly outpaced domestic spending giving a slight window of hope for the US economy.

Brusuelas emphasized that the weak domestic economic activity of the United States cannot support industrial production.  Luckily for the US, foreign demand for US products kept the economy to stay afloat.