Personal incomes rise, but spending doesn’t

WASHINGTON -- As the Federal Reserve meets Tuesday and Wednesday to consider new stimulus for the weak economy, one of the key data it will be looking at is consumer spending, which is clearly waning.

Last Friday’s second-quarter economic report already showed that personal spending -- and the broader economy -- slowed sharply in the spring. New monthly data from the government Tuesday confirmed that, but also pointed to weakening momentum heading into the summer.

In fact, inflation-adjusted personal spending slipped 0.1% in June from the prior month -- the first drop in real spending since last August, according to the Commerce Department. Purchases of both goods and services dipped last month.

“June’s spending report offers little hope for a stronger start to the third quarter,” said Martin Schwerdtfedger, senior economist at TD Bank, in a note to clients.


The drop in spending isn’t because consumers’ earnings shrank; the Commerce report showed a decent 0.3% gain in real personal income in June, thanks largely to growth in wages.

What happened was that consumers, rather than spend, decided to sock away more of their extra income. The saving rate rose to 4.4% in June from 4% in May. That’s the highest rate in a year.

“Renewed concerns over the jobs outlook, growing fears of tax hikes and worries over the health of the overall economy are prompting households to keep their wallets in their pockets,” Paul Dales, senior U.S. economist at Capital Economics, said in a note.

Consumer spending accounts for about two-thirds of economic activity, and it’s even more important today because government is cutting back on spending while two other engines of the economy -- business investments and net exports -- are losing some of their steam.         


All of which could give the Fed more reason to announce new action, even if it’s just symbolic, at the conclusion of its two-day meeting.


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