Buying Spree in June Gives Nation a Boost

Consumers propped up the stumbling U.S. economy with their spending in June despite growing worries about losing their jobs and a miserly increase in incomes.

Personal-consumption expenditures rose an unexpectedly strong $25.7 billion, or 0.4%, in June, the result largely of a bump in the purchase of big-ticket items such as cars, the Commerce Department said Tuesday. The consensus of private economic forecasters had been a 0.3% increase.

The uptick in consumption came despite new evidence that the economy was not snapping back as quickly as some had hoped. An index of manufacturing activity in the Chicago area showed that more jobs and production were cut in July as new orders fell further.

And it occurred as signs that consumers were growing more concerned about the economy and their chances of being laid off. The Conference Board, a New York business research group, announced that its index of consumer confidence fell to 116.5 in July from a revised 118.9 in June. Most analysts had predicted that it would rise.

“The moderate decline in confidence signals slow economic growth ahead,” said Lynn Franco, director of the group’s consumer research center.

Federal Reserve Chairman Alan Greenspan has repeatedly said consumer spending is key to maintaining the nation’s economic health. He has warned that any substantial drop in spending could send the economy into recession.

Consumers’ importance was underscored Friday when the government announced that the economy grew at an anemic 0.7% annual rate in the April-through-June period. Without consumers, who boosted their spending at a rate of 2%, the economy would hardly have grown at all. The nation’s business sector, for example, slashed equipment and software investment at a 14.5% annual pace.

Some analysts warned of signs that the consumer spending spree could not go on forever.

Friday’s growth figures showed that although consumption grew during the second quarter, it did so at a slower pace than during the first three months. The Commerce Department said that although personal income increased in June by $27.6 billion, or 0.3%, the increase was outpaced by spending, pushing the already low savings rate down from 1.2% in May to 1.1% in June.

In addition, Conference Board officials said the “almost nonstop layoff announcements” of recent months had taken their toll on consumers’ optimism, which could dampen their willingness to keep spending.

The share of people describing current business conditions as “bad” grew from 12.6% in June to 14.4% in July, according to the group. Those who expect fewer jobs to be available in the next six months increased from 16.3% to 18.1%.

The nation’s unemployment rate rose to 4.5% in June, when employers slashed 114,000 jobs. The economic consensus is that July’s rate will climb to 4.7% and businesses will shed 38,000 more jobs. The Labor Department will release July figures Friday.

“Right now, consumer confidence has stabilized and is moving sideways, but I’m not optimistic it’s going to stay that way,” said Michael J. Moran, chief economist with Daiwa Securities America Inc. in New York.

One reason to think the jobless rate could jump is what’s going on in manufacturing. The National Assn. of Purchasing Management-Chicago index gave what may turn out to be a sneak preview of the national picture by falling from 45.6 in June to 38 last month. Any reading below 50 signals that business declined. Economists thought the figure would slip to just 43.5.

Analysts said the Chicago number suggested that a national report, due out today, would show a similar pattern, signaling that predictions of a turnaround in the manufacturing sector this year were premature.

“It looked like manufacturing hit bottom in March and was recovering,” said Kathleen Camilli, chief economist with Tucker Anthony in New York. “But if these [Chicago] numbers hold up nationally, that implies there has been a reversal and we’re headed down again.”

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Consumer Confidence

From a monthly survey of 5,000 U.S. households.

Index: 1987=100.

July: 116.5

Source: Conference Board

Personal Spending

Seasonally adjusted annual rate, in trillions of dollars:

June: $7.07 trillion

Source: Commerce Department