- The Washington Times - Wednesday, August 2, 2000

Americans went back to shopping in June, especially for big-ticket items like cars, pushing up consumer spending by the largest amount in three months.

The 0.5 percent gain in consumer spending, which accounts for two-thirds of all economic activity, was the best showing since a similar increase in March. Spending had slowed to increases of 0.2 percent in April and 0.3 percent in May.

Many economists viewed the new report as another sign that the economy is still feeling few effects from a string of six interest-rate increases by the Federal Reserve starting in June 1999.

They said the rebound in retail activity and other signs of newfound strength raised the likelihood of a seventh rate increase when the Fed meets Aug. 22.

"The consumer has not dropped shopping," said Paul Taylor, chief economist for the National Automobile Dealers Association.

He noted that much of the strength in July came from a rebound in auto sales, which drove the durable-goods category of spending up by 0.9 percent, after removing the effect of inflation. It was the first advance in the key sector since February.

"Consumer confidence remains high and that is propelling robust consumer durable sales," Mr. Taylor said, predicting that new-vehicle sales would hit 17 million units this year, giving the auto industry back-to-back record years.

However, two other reports yesterday did provide hints of a slowdown.

The National Association of Purchasing Management said its production index remained at 51.8 percent in July, ending a four-month slide. The key gauge of manufacturing activity is at its lowest point since January 1999, when manufacturing was still reeling from the effect of the global financial crisis.

Additionally, construction spending fell 1.7 percent in June, according to the Commerce Department, marking the third consecutive monthly decline as the Fed's interest-rate increases continued to take their toll on home building.

Some analysts said they believed the Fed would use these signs of a slowdown as justification for keeping interest rates unchanged this month, despite last week's surprisingly strong report of overall economic growth in the second quarter.

The gross domestic product the economy's total output of goods and services rose at an annual rate of 5.2 percent in the April-June quarter, confounding expectations of a slowdown from the first-quarter rate of 4.8 percent.

Merrill Lynch economist Andrew Groat said the decline in construction activity in June, information not known when the GDP was released Friday, probably would shave 0.4 percentage points from the initial 5.2 percent estimate when the figure is updated later this month.

He said the various reports were consistent "with the reality of a soft landing," in which growth slows in line with the Fed's desires to keep inflation under control, but not enough to threaten a recession.

Some analysts who are forecasting a rate increase this month said one reason for this view is that the Fed would prefer to wrap up its credit-tightening campaign in August before its next meeting Oct. 3, when the presidential campaign will be in full swing.

Americans' incomes rose 0.4 percent in June, slightly better than the 0.3 percent May gain, but below a 0.6 percent rise in April.

Disposable personal incomes, which strip out money needed to pay taxes, rose by 0.3 percent, below the 0.5 percent rise in spending.

With spending rising faster than incomes, the savings rate fell to 0.1 percent in June, down from 0.3 percent in both April and May.

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