Incomes Rise; Americans Sock More of It Away

Americans’ incomes rose strongly in July, but they saved more of it and spent frugally, the Commerce Department said Monday in a report indicating the economic expansion is slowing.

Incomes from wages, salaries and all other sources, such as rents and dividends, rose 0.5% from June to a seasonally adjusted annual rate of $5.69 trillion. But spending was up a scant 0.2% to an annual rate of $4.62 trillion.

June incomes, by contrast, rose only 0.1% while spending gained 0.5 %.

The amount socked away in savings after taxes increased to 4.1 cents out of each dollar earned, from 3.7 cents in June.

The government report fits with other, more current, private-sector indications from businesses that rising interest rates are cutting into sales opportunities and causing the manufacturing sector to lose some vitality.

Economic growth is widely expected to slow in the second half, partly due to five increases in short-term interest rates this year by the Federal Reserve Board.

So far, gains in personal income have been solid enough to add to the potential buying power of consumers, whose purchases of goods and services--everything from new cars to vacations--account for two-thirds of U.S. economic activity. Such purchases have slacked off recently in the more costly credit environment.

“Manufacturers’ confidence has been tempered in recent months by interest rate hikes and by evidence that the Fed’s actions have begun to have their desired effect of slowing growth in the U.S. economy,” said Daryl Delano of Cahners Economics Inc. in Newton, Mass.

The economic forecasting firm’s monthly survey of 400 business executives shows that business confidence fell two points from July to 66.6 in August. Six of seven measures of business activity, from employment to production to marketing expenditures, were weaker; only research and development spending increased from July.

“Inventory buildups were so significant in the second quarter this year that they are a major factor leading us into a slower second half,” Delano said. He added that Cahners forecasts a second-half annual growth rate of just 2.1%. By contrast, total goods and services output measured by gross domestic product grew at an average rate of about 3.6% a year in the first six months.

Consumer demand has eased for housing and for new cars because of higher mortgage payments and higher car prices and loan interest rates.

However, more moderate consumer spending is not necessarily considered bad, because it is less likely to set off inflationary pressures or cause policy-makers to raise interest rates again soon.

Personal Income

In trillions of dollars, seasonally adjusted annual rate:

July 1994: 5.69

Source: Commerce Department

Personal Spending

In trillions of dollars, seasonally adjusted annual rate:

July 1994: 4.62

Source: Commerce Department