US consumer spending picks up pace

US consumer spending rose at its fastest pace in five months in July, supporting views the economy was not falling back into recession.

The Commerce Department said today consumer spending increased 0.8 per cent on strong demand for motor vehicles, after slipping 0.1 per cent in June.

Economists had expected spending, which accounts for about 70 per cent of US economic activity, to rise 0.5 per cent.

When adjusted for inflation, spending rose 0.5 percent last month, the largest gain since a matching increase in December 2009, after being flat in June.

The data was the latest to suggest the economy started the third quarter with some strength after growth almost stalled in the first half of the year.

It also offered hope that output would continue to expand, though at a moderate pace. However, the risks of a new recession have risen following a sharp drop in stock prices and the erosion of consumer sentiment.

"If anybody was concerned about this recession risk people were taking about, this personal spending number seems to be another point against that recession argument," said Jeffrey Greenberg, an economist at Nomura Securities in New York. "It seems at least through July, the economy was not too poor."

Industrial production, retail sales and employment data have so far been consistent with a slow economic growth scenario rather than an outright contraction in output.

Consumer spending braked sharply to a 0.4 per cent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.

The overall economy grew at a 1 per cent pace in the second quarter after expanding only 0.4 per cent in the prior quarter.

Real spending on durable goods increased 2 per cent last month, likely reflecting a pick-up in motor vehicle sales as the shortage of autos caused by the supply disruptions from Japan eased.

Overall spending in July was lifted by a 0.3 per cent rise in income as employers stepped-up hiring. Income rose 0.2 per cent in June and economists had expected a 0.3 per cent increase last month.

Disposable income increased 0.3 per cent, but when adjusted for inflation fell 0.1 per cent - the first decline since September.

With spending outstripping real disposable income, savings fell to an annual rate of $582.8 billion from $638.6 billion in June.

The report also showed inflation pressures remain elevated. The personal consumption expenditures price index, or PCE, rose 0.4 per cent after slipping 0.1 per cent in June.

Compared to July last year, the index was up 2.8 per cent, the largest increase since October 2008, after advancing 2.6 per cent in June.

The core PCE index - excluding food and energy - rose 0.2 per cent for the second straight month.

The core index, which is closely watched by Federal Reserve officials, increased 1.6 per cent in the 12 months through July, the largest increase since May 2010, after rising 1.4 per cent in June. The Fed would like to see it close to 2 per cent.

Reuters