US consumer spending grows but experts warn of precarious outlook

US consumers splurged in July even as their income stagnated and sentiment soured, latest figures showed yesterday, but experts warned of a precarious economic outlook.

Consumer spending, which accounts for two-thirds of US economic activity, advanced 1 per cent in July after a 0.5 per cent increase in June, beating most expectations.

But personal income was unchanged in July, after advancing 0.7 per cent in June.

"The spending numbers were sort of in line with expectations; we were getting earlier indications of a strong increase in spending," said Mr Paul Ferley, a Chicago-based economist at Bank of Montreal. "A bit disconcerting though is the income measure. We were expecting it to come in on the soft side but the flat number is even weaker than earlier numbers were suggesting," he added.

"It throws into question whether the strong gains in consumption can be sustained. If we see a pick-up in employment, that would help. But we are not getting any indications that is in the offing in August."

At the same time, consumer sentiment weakened. The University of Michigan's key index of sentiment, compiled from responses to a survey of US consumers, fell to 87.6 points in the final August reading, from 88.1 in July.

Most experts had expected a slight rise in the index for August, after sentiment was battered in July by a slump on the stock market, weak economic data and a slew of corporate accounting scandals.

"I am hoping this is close to the end of the decline in confidence," said Mr Joel Naroff, chief economist and president of Naroff Economic Advisors, who had feared a worse number.

"I think we will see that happen as the stock markets hold in through the month of September, but that has to be seen."

Consumer spending in July was driven by purchases of durable goods - big-ticket items such as cars and washing machines - which leapt 3.7 per cent, the steepest increase since October 2001. Spending on non-durable goods and services each advanced 0.6 per cent.

But disposable personal income, or income less personal tax payments, edged up only 0.2 per cent in July, the smallest increase since November 2001, the figures showed.

Wages and salaries dropped 0.2 per cent in July to $5.022 trillion, partly reversing a 0.8 per cent increase the previous month.

"That says it is a very, very balanced growth pattern."

But the wage data were worrying, he said. "We knew the wage data would be bad and it was," Mr Naroff said. "That is a warning that going forward we cannot keep this up unless we have some decent wage growth," he added.

Industry, meanwhile, appeared to be strengthening.

Businesses in the US midwest picked up activity in August, an index released by the Chicago Purchasing Management Association showed.

The association's barometer of regional business activity - the Chicago purchasing managers index - beat most experts' expectations by climbing to 54.9 points in August from 51.5 in July.