Spending edges up in July, but consumers remain a concern

WASHINGTON -- Consumer spending edged up in July with help from the popular cash-for-clunkers program, but household incomes, the fuel for future spending increases, were flat. Another report said consumer confidence fell to its lowest in four months in August..

Consumer spending is the big question mark as the economy struggles to emerge from the recession. Economists worry that households hurt by rising unemployment, weak income growth and depleted investments will not provide the support the economy needs to rebound to sustained growth.

The Commerce Department said Friday that consumer spending rose 0.2% in July, matching economists' expectations. Personal incomes were unchanged last month, a weaker showing than the expected 0.2% gain.

With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2% from 4.5% in June. The savings rate was 2.6% a year ago.

Economists expect the savings rate to rise in coming months to around 6% as workers try to rebuild depleted nest eggs. The process of rebuilding savings is one of the factors expected to depress consumer spending and weaken the broader recovery.

The modest rise in spending last month followed a 0.6% jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending rose 0.2% in July, and 0.1% in June.

The slight rise in spending reflected a 1.3% jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of non-durable goods such as clothing actually fell 0.3% last month.

The unchanged reading for personal incomes followed large swings in the previous two months that reflected payments to individuals from the government's $787 billion economic stimulus program. Those payments pushed incomes up 1.4% in May and their absence in June caused incomes to fall 1.1%.

Incomes have taken a beating during the recession as employers slashed payrolls and forced workers to take unpaid days off to hold down wage costs. In addition, households with sufficient income to hit the shopping malls have trimmed their purchases and boosted savings to cope with a severe financial crisis which sent the stock market into a nosedive last year.

Meanwhile, the Reuters/University of Michigan Surveys of Consumers said its final index of confidence for August fell to 65.7 from 66.0 in July. That was the lowest since 65.1 in April but above economists' expectations for 64.5 and also higher than this month's preliminary reading of 63.2

"Confidence rebounded in late August as consumers increasingly expected improved conditions in the national economy even as they reported the worst assessments of their finances since the surveys began in 1946," the report said.

Consumers rated the current economic conditions the worst since March, when the stock market hit 12-year lows. This index fell to 66.6 from 70.5 in July. However this was also an improvement from 64.9 earlier this month.

The concern is that consumer spending, which accounts for 70% of economic activity, may not be strong enough to propel a sustained recovery from the longest recession since World War II.

The Federal Reserve has pushed a key interest rate to a record low near zero in an effort to boost the economy and is pledging to keep rates low for a considerable period even as the economy begins to grow again.

The Fed is able to make that pledge because inflation is not a problem. A price gauge tied to consumer spending was down 0.4% in July, reflecting the drop in energy prices. Excluding food and energy, the price gauge showed a 0.1% rise, and over the past year increased 1.4%, well within the Fed's comfort zone for inflation.

The government reported Thursday that the overall economy, as measured by the gross domestic product, fell at an annual rate of 1% in the April-June quarter. It marked the fourth consecutive decline in GDP, the longest stretch on records that go back more than six decades.

Many economists believe GDP in the current July-September quarter will rebound to growth above 3% and remain at that level in the fourth quarter. The economic growth likely will reflect a boost from the highly successful clunkers program to boost car sales and other government stimulus efforts.

But the fear is that economic growth will slip back in the early part of 2010 as the impact of the government programs fade and unemployment rises. The 9.4% jobless rate in July is expected to edge up to 9.5% in August and keep rising until it tops 10%. That will be a tough environment to see strong gains in consumer spending.

Some analysts worry that the country could be headed for a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.

The troubles consumers face have meant tough times for the nation's retailers. A survey of big retail chains showed that shoppers remained tightfisted in July, a development that raised worries about back-to-school sales and the holiday shopping season later this year.