- The Washington Times - Tuesday, August 1, 2006


Consumer spending was sluggish in June as Americans had to divert more cash to filling up their gas tanks, and a key inflation gauge rose at the fastest clip in more than a decade.

That raised concerns in financial markets that the Federal Reserve will push interest rates up for an 18th consecutive time because of concern about inflation.

The Commerce Department reported that consumer spending, after adjusting for inflation, posted a weak 0.2 percent rise in June, marking the fourth straight month of 0.2 percent or less.

An inflation gauge tied to consumer spending posted a 0.2 percent increase in June and a rise of 2.4 percent for the 12 months ending in June, matching the rise in the 12 months ending in September 2002 and the fastest increase since a 2.5 percent rise in the 12 months ending in April 1995.

In other economic news, a report on construction spending showed unexpected strength in July, rising by 0.3 percent to a record level, helped by big increases in spending on government, office and hotel projects.

And the Institute for Supply Management’s gauge of manufacturing activity in July posted a stronger-than-expected increase to 54.7, above the June reading of 53.8. However, part of that acceleration reflected a rise in raw-materials prices as the costs of everything from fuel to paper increased.

The worrisome increases in inflation raised concerns on Wall Street that the Federal Reserve will feel the need to boost interest rates when policy-makers meet on Tuesday.

“The Fed has to tighten next week, pure and simple,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “Core inflation is too high and accelerating.”

Not all economists agreed with that assessment, however. They noted the weak rise in consumer spending, which accounts for two-thirds of total economic growth.

The weakness in consumer demand was a major factor in the government’s report last Friday that overall economic growth slowed to an annual rate of just 2.5 percent in the April-June quarter, far below the economy’s 5.6 percent growth rate from January through March.

“All the latest economic indicators continue to show the economy on a gentle glide path toward a soft landing,” said Bernard Baumohl, an economist with the Economic Outlook Group.

, a forecasting firm in Princeton Junction, N.J.

The Fed is hoping to slow the economy enough to keep inflation under control. However, the new spending report showed the opposing forces facing the central bank. While consumer spending and the overall economy are slowing, inflation is getting worse.

The 2.4 percent rise in core prices is well above the Fed’s comfort zone of 1 percent to 2 percent for core inflation, which excludes volatile energy and food.

Before adjusting for inflation, consumer spending rose by 0.4 percent in June, down from a 0.6 percent increase in May. However, after taking out the impact of higher prices for gasoline and other items, the spending increase was just 0.2 percent in June, matching the weak inflation-adjusted gains in April and May.

The 0.3 percent rise in construction spending was stronger than the 0.1 percent advance analysts had forecast and pushed total spending to a record level of $1.22 trillion at an annual rate.

The strength came from a 0.8 percent rise in government construction activity, reflecting a 0.9 percent increase in state and local building projects which rose to a record $255.3 billion at an annual rate. Spending on hotels and office buildings was also up.

However, economists still expect construction activity to weaken in coming months, reflecting a slowdown in housing. For June, housing construction dropped by 1 percent as builders struggled to deal with a backlog of unsold homes, reflecting this year’s jump in mortgage rates.

Personal incomes rose by 0.6 percent in June, in line with Wall Street expectations, while after-tax incomes after adjusting for inflation were up 0.4 percent. This increase was not enough to lift the personal savings rate out of negative territory, where it has been for 15 straight months.

Savings as a percentage of after-tax incomes stood at a negative 1.5 percent in June which meant consumers were still dipping into past savings or borrowing to finance their spending.

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