- The Washington Times - Friday, August 28, 2009

WASHINGTON (AP) — Consumer spending increased in July with help from the federal government’s popular Cash for Clunkers program, but household incomes for future spending were flat, the Commerce Department said Friday.

The agency said consumer spending increased 0.2 percent last month, matching economists’ expectations and following a 0.4 increase in June.

Personal incomes were unchanged, failing to meet expectations of a 0.2 percent gain. Incomes declined 1.3 percent in June.

Consumer spending is the big question mark as the economy struggles to emerge from the longest recession since World War II. Economists worry that households hurt by rising unemployment, weak income growth and depleted investments will not provide the support the economy needs to rebound to sustained growth.

On Thursday, a report confirmed the economy shrank at an annual rate of just 1 percent in the spring.

On Thursday, a report confirmed that the economy shrank at an annual rate of just 1 percent in the spring.

Many analysts say growth likely returned in the current quarter. Smaller dips in consumer spending and other areas during the April-June period led some economists to raise their forecasts for the July-September quarter.

But with unemployment aid claims stubbornly high, Americans may benefit little from a recovery if jobs remain scarce and spending stays too low to fuel a strong rebound.

The Commerce Department estimated that the U.S. gross domestic product, the broadest gauge of economic health, shrank at an annual rate of 1 percent in the second quarter. The new estimate of the nation’s output of goods and services was the same as an earlier estimate released last month.

The negative figure marks a record fourth consecutive quarterly decline. But it was far smaller than the nosedive the economy had taken during the previous two quarters.

Businesses did slash inventories at an even greater rate than had been expected in the spring. But economists were encouraged by upward revisions to consumer spending, exports and housing construction. Analysts had expected the second-quarter economic figure to show a drop of 1.5 percent.

“The big surprise in this report was that there was enough spending in the consumer sector and elsewhere to offset all the loss from inventory reductions,” said Nigel Gault, chief U.S. economist at IHS Global Insight.

Consumer spending, which accounts for about 70 percent of total economic activity, fell at an annual rate of 1 percent in second quarter. It was a slight improvement from the 1.2 percent decline reported last month.

Gault predicted the economy will gain momentum in the current quarter and final three months of this year as businesses switch from trimming stockpiles to rebuilding inventories. He expects the GDP to jump to above 3 percent in the July-September quarter, boosted by the Cash from Clunkers auto program.

Growth likely will remain around 3 percent in the fourth quarter, Gault said. But then it could slip in the first half of next year as the support from inventory rebuilding begins to fade. Consumers, faced with bleak job prospects, won’t likely be able to take up the slack, he said.

Unemployment is not expected to peak until next spring, probably somewhere above 10 percent. The jobless rate is now 9.4 percent.

White House economic adviser Christina Romer earlier this week said the unemployment rate is likely to hit 10 percent this year. Economists think the unemployment rate will inch back up to 9.5 percent for August, with 220,000 more jobs lost, down a bit from 247,000 in July. That report is scheduled for release next week.

The 1 percent dip in GDP in the April-June quarter followed declines of 6.4 percent in the first quarter and 5.4 percent in the final three months of 2008, the sharpest back-to-back declines in a half-century. The four straight quarterly declines in GDP mark the first time that has occurred on government records dating to 1947.

The recession that began in December 2007 is the deepest as measured by the drop in GDP, which is down 3.9 percent from its previous peak.

Even though economists expect the economy to start growing again in the current quarter, signaling the end of the recession, that won’t mean the end of job losses. Businesses likely will continue to keep tight control over labor costs until they see more evidence that the recovery will not falter.

Some analysts worry the country could face a double-dip recession in which growth returns for a while, only to falter again as beleaguered consumers remain reluctant to increase spending.

First-time unemployment claims fell to a seasonally adjusted 570,000, from an upwardly revised 580,000 the previous week, the Labor Department said Thursday. The number of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April.

The weekly figures remain far above the roughly 325,000 claims that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.

Federal Reserve Chairman Ben Bernanke said last week that the economy appeared to be “leveling out” and was likely to begin growing again soon. President Barack Obama appointed Bernanke to another four-year term Tuesday.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide