Consumers Spend in July at Fastest Pace in 9 Months

U.S. consumers, undaunted by their nagging anxiety about the economy and motivated by free financing on cars and merchandise discounts, spent in July at the fastest pace in nine months--surging a full 1%--even as personal income stalled.

Personal spending rose twice as fast as the 0.5% increase posted in June, the Commerce Department said Friday. The jump came despite plunging confidence amid big stock market losses and corporate scandals. It was the biggest gain since October, easily beating forecasts.

A 3.7% advance in spending on durable goods drove the gain, mostly on the back of stronger auto sales spurred by no-interest financing and other incentives

Meanwhile, a key gauge of Midwest manufacturing from the National Assn. of Purchasing Management-Chicago rose more than expected in August to 54.9, partly reversing a sharp drop in July.

The index posted its seventh straight month of growth, soothing fears of a sharp pullback in the sector.

Friday’s data pointed to an economy struggling to get to full speed but unlikely to slip back into recession as some economists feared a month ago.

Jim Glassman, senior U.S. economist at J.P. Morgan Chase, said if a national manufacturing survey, to be released next week, also shows a rebound, “all those worries about a double-dip recession have to be set aside.”

The Institute of Supply Management’s August survey on U.S. manufacturing is due Tuesday and is considered critical for the economic outlook. It also posted a steep fall in July.

Other data this week showed record new-home sales and a big jump in durable goods orders, but unemployment claims still rose.

“This week’s news is suggesting final demand is doing pretty well this summer. The only thing that’s missing from this picture is job growth,” Glassman said.

The July spending increase came even though consumer sentiment fell for a third straight month. The University of Michigan August index slipped to 87.6, from 88.1 a month earlier.

The final August current conditions index edged lower to 98.5, from 99.3 in July and a mid-month reading of 100.2, while the expectations index, which tracks attitudes about the 12 months ahead, slipped to 80.6 in August from 81.0 in July but was above the preliminary reading of 80.

“One of the things we have seen in the past year is that consumers continue to be worried about the economy, but they still seem to be spending,” said Steven Wood, chief economist at Financial Oxygen in Walnut Creek, Calif.

Resilient consumption has encouraged Federal Reserve officials to take a cautiously optimistic view of the economy, saying that interest rates at 41-year lows of 1.75% should be enough to keep the recovery on track.

Still, income growth was unchanged after June’s revised 0.7% gain, the weakest since November 2001 and below forecasts for a 0.2% rise. All of this reflects a stagnant job market, economists said.

Without steady income gains, it will be difficult for consumers to maintain July’s pace of spending, economists warned.

Wages and salaries, the biggest source of income growth, fell 0.2%, the first drop since April.

With spending strong and income flat, the personal savings rate edged down to 3.4% of disposable income, the lowest level since December.

“The income number is very important, because income will drive spending going forward,” said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. “Job and wage growth will remain the driver of spending going forward. But a continued pace of spending faster than income growth is not sustainable.”

The report also showed tame inflation, according to the Fed’s favorite measure.

The price index for personal consumption expenditures rose at a 1.2% rate in July, compared with a year earlier, up from 1% in June.

Excluding food and energy, the year-over-year gain was 1.4%, down from 1.6% in June.