Rise in Consumer Spending Keeps Recession at Bay

U.S. consumers continued to increase their spending in June, particularly for new cars and light trucks, rounding out a quarter in which their purchases once again kept the U.S. economy from slipping to a recession.

The Commerce Department reported Friday that retail and food-service sales rose only 0.2% last month, half of the May increase. But a roaring gain of 1.4% in April meant that for the entire spring quarter sales increased at a 6.1% annual rate, the best reading in a year.

Meanwhile, other reports showed that consumer attitudes continue to improve slowly after a sharp decline earlier this year and that inflationary pressures are easing.

The University of Michigan said its preliminary consumer sentiment index for this month rose to 93.7 from last month’s final reading of 92.6. The index reached a low of 88.4 in April.

“The early July gain was due to more favorable prospects for both personal finances as well as the economy during the year ahead,” analysts at the university said.

“The key point is that consumers’ expectations about the future rose for the third straight month, even as their view of current conditions dipped,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. “Expectations are the key to future spending, so we consider this report another brick in the rising wall of evidence suggesting the economy is turning up.”

One factor making consumers more optimistic probably is the recent substantial slide in some energy prices.

The Labor Department said that its producer price index for finished goods fell 0.4% last month because the cost of energy items dropped 2.5%, whereas prices for other goods increased only slightly. Gasoline prices declined 3.7%, residential natural gas prices were off 5.8%, electrical power prices dropped 1.5% and fuel oil prices dipped 0.2%.

Summing up Friday’s reports and other recent statistics, economist James Glassman at JP Morgan Chase Securities in New York said, “There’s enough going on to make you maintain confidence that the economy is going to pick up in the second half of the year. The trend for consumers is quite remarkable considering all the layoff announcements and worries about the future.”

With consumer spending for goods and services--most of the latter are not included in retail sales--probably up in the April-June period at a 2% to 2.5% annualized rate after adjustment for inflation, more and more forecasters have become convinced the U.S. economy expanded this spring rather than contracted.

“It sounds odd, but the quarter’s over, and we aren’t sure what happened,” Glassman said. The biggest uncertainties, he said, are how much businesses cut back spending for new plants, equipment and software, how much businesses reduced their stocks of unsold goods and what happened to the U.S. trade deficit.

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Producer Prices

Index of finished goods prices; 1982=100; seasonally adjusted:

June: 141.7

Source: Bureau of Labor Statistics