Higher July Wages Boost Income 0.6%; Spending Slows
Americans’ personal incomes, bolstered by the biggest increase in wages in seven months, rose 0.6% in July while consumer spending slowed because of a drop in auto sales, the government reported Friday.
The increase in incomes was identical to the June advance and would have been an even stronger 0.8% had it not been for a big drop in farm subsidy payments.
Spending on personal consumption, which includes virtually everything except interest payments on debt, rose 0.5% in July. While this was less than half the 1.1% June advance, economists said it showed that overall demand remained strong despite a decline in car purchases.
As with other recent statistics, economists found signs of growing inflationary pressures in the report, primarily in a 1% gain in wages and salaries, the biggest rise in this key income component since last December.
While rising incomes are normally viewed as healthy, economists have begun worrying that demand pressures are outstripping the economy’s ability to produce goods, thus creating a classic recipe for rising inflation.
Those fears were heightened Thursday when the government reported that the overall economy, as measured by the gross national product, was growing at a 3.3% annual rate from April through June, faster than previously believed, while a GNP price index shot up at the fastest rate in six years.
“We have a lot of economic activity out there, and it is generating a lot of jobs and spending power for American consumers,” said Sandra Shaber, an economist with the Futures Group, a Washington consulting firm.
She said consumers, for the first time since the late 1970s, appear to be basing purchases on a belief that they needed to act before prices went higher.
No Signs of Slowing
“Up until recently, we have had enormous resistance to price increases, but I think we are beginning to see a buildup of inflationary expectations,” she said.
David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer, said the personal income report indicates that economic growth is showing no signs of slowing in the July-September quarter, despite efforts by the Federal Reserve to dampen demand by pushing interest rates higher. He predicted further credit tightening in the months ahead.
“This is too much of a good thing for the Fed,” he said. “We are seeing the strength in consumer spending coming on top of an already strong trade sector and stepped-up spending by businesses for plant and equipment. It raises the threat of accelerating inflation.”
