Consumers still spending; inflation in check

Consumers shrugged off sagging home prices and financial market turmoil in August to push up spending by a better-than-expected amount.

In other upbeat news, a key inflation gauge showed that price pressures outside of food and energy eased further last month and construction activity rose, thanks to continued strength outside of housing.

The batch of reports Friday offered some reassurance that the current economic expansion would not be derailed by the continued troubles in housing and the severe credit crunch that roiled financial markets last month. Consumer spending, which accounts for two-thirds of total economic activity, is considered the key to whether the country avoids a recession.

The Commerce Department reported that consumer spending rose by 0.6% in August, the best showing in four months and better than the 0.4% increase that had been expected. Inflation-adjusted spending was also up 0.6%, the best showing for this measure in 10 months.

“So far, the housing and credit problems have not dented the consumer’s armor,” said Joel Naroff, chief economist at Naroff Economic Advisors. “This was a good report as household spending stayed up while inflation came down.”

An inflation gauge tied to consumer purchases showed that prices excluding food and energy rose just 1.8% in August compared with a year earlier. That was the slowest year-over-year price increase since February 2004. It marked the third straight month that core inflation has been inside the Fed’s comfort zone of 1% to 2%.

The 0.6% gain in spending was accompanied by a 0.3% rise in incomes, slightly lower than had been expected. Analysts blamed that weakness on the fact that employers cut 4,000 jobs last month, the first monthly job loss in four years.

The report on construction spending showed a 0.2% increase in August, a surprise given that construction activity had been expected to drop 0.2% during the month because of the continued troubles in housing.

Housing activity was down for an 18th consecutive month, falling 1.5%, as the housing industry remained in a severe downturn and builders slashed production in an effort to get inventories under control.

Reports earlier this week showed that sales of both existing and new homes were down sharply in August with the median price of a new home falling 7.5% from a year ago, the biggest decline in 37 years.

The weakness in housing construction in August was offset by gains in areas outside of housing. Construction of office buildings, shopping centers and government projects all showed strong gains.

The overall economy expanded at a solid 3.8% rate in the April-June quarter even though consumer spending slowed to a growth rate of just 1.4%, the weakest performance since the end of 2005.

Analysts said the August strength should push consumer spending up to a rate of around 3% in the current quarter although they forecast that the drags from the housing slump and the credit crunch had yet to be fully felt on the economy.

They also cautioned that some of the strength seen in August reflected one-time events such as strong auto sales because of dealer incentives and heavy spending on electricity because of an August heat wave.