Incomes drop, spending slows in July

Consumer spending slowed to a crawl and personal incomes plunged in July, reflecting the waning effects of $93 billion in stimulus payments.

A Commerce Department report released Friday showed that consumer activity got off to a shaky start in the third quarter, raising new worries that the economy could falter in coming months because of rising unemployment, a continuing credit crisis and the deepest housing slump in decades.

Personal incomes fell a bigger-than-expected 0.7% in July, the biggest drop in nearly three years, while consumer spending edged up a modest 0.2%.

The report showed that the June and July spending figures were skewed by a jump in inflation. Over the last 12 months, an inflation gauge tied to consumer spending rose by 4.5%, the biggest jump in 17 years, led by higher costs for energy and food. Without the big move in prices, consumer spending actually would have fallen 0.4% last month after dropping 0.1% in June, underscoring how weak current activity is.

“Consumers pulled back on real spending in both June and July in the face of weak employment conditions, higher energy prices and further declines in household net worth,” said Brian Bethune, chief U.S. economist at Global Insight.

The government reported Thursday that the overall economy, as measured by gross domestic product, rose 3.3% in the April-June quarter, a significant rebound from growth of just 0.9% in the first quarter and a decline of 0.2% in the final three months of last year.

The 0.7% drop in personal incomes in July followed a 0.1% rise in June and a 1.8% surge in May. After-tax incomes fell an even bigger 1.1% in July, after a 1.9% decline in June and a 5.7% surge in May. All the income figures were heavily influenced by the rebate checks.