- The Washington Times - Tuesday, August 5, 2008

WASHINGTON (AP) — Rising prices, falling home values, stagnant wages and tight credit. It’s a potent combination that has hit the American consumer hard.

In June, the second-biggest rise in prices in nearly three decades muted the impact of billions of dollars in government stimulus payments, government figures showed Monday.

Incomes barely budged in June and consumer spending retreated after taking into account the higher prices for food, energy and other items, the Commerce Department data show.

Consumer spending was up 0.8 percent in May and 0.6 percent in June, the Commerce Department said. Those increases were slashed to a modest 0.3 percent increase in May and a drop of 0.2 percent in June, however, when adjusted for rising prices of gasoline, food and other products. Incomes rose just 0.1 percent.

An inflation gauge tied to consumer spending jumped by 0.8 percent in June. That was the second-biggest monthly increase since 1981. In September 2005, the gauge rose by 1 percent after Hurricane Katrina shut down Gulf Coast oil facilities and sent energy prices soaring.

Economists said the surge in energy and food prices had dampened the impact of the government’s economic stimulus program, which was pumping out $76 billion in payments during May and June as Washington sought to keep the economy from falling into a deep recession.

“You’ve got declining home prices, very tight credit conditions, a soft jobs market and a weak stock market. The consumer has got a lot to deal with,” said David Jones, chief economist at DMJ Advisors, a Denver consulting firm.

Consumers do seem to be getting one break. Oil prices, already down more than $20 from their highs reached in early July, dipped briefly below $120 in trading Monday, the first time that has occurred since May.

Even with the recent declines, gasoline is selling for around $3.88 a gallon, up more than $1 from the price a year ago. Last month, gas prices hit a now high of $4.11, according to AAA, the Oil Price Information service and Wright Express.

Given that economists estimate that every $1 increase in gasoline is like a $120 billion tax, it’s understandable that consumers are feeling stretched.

Ken Sheeley, 54, a nurse anesthetist who lives in Richmond, said his family has become more cost-conscious, stocking up on staples such as spaghetti, flour and sugar at Sam’s Club and Costco Wholesale Corp. instead of buying them at the grocery store.

The meager 0.1 percent rise in incomes in June followed a sizable 1.8 percent jump in May. Those results were skewed by how the government accounted for the billions of dollars in rebate checks disbursed during the two months, inflating the May figure and making the June performance look weaker.

“The rebates are not translating into anywhere near the spending impulse that Congress and the administration had hoped for,” said Brian Bethune, senior U.S. economist at Global Insight, a private forecasting firm. “Under these circumstances, the economy remains in very fragile condition.”

The savings rate, as a percent of after-tax incomes, dropped to 2.5 percent in June after having shot up to 4.9 percent in May. Both months had a savings rate above the 0.3 percent level of March before the stimulus payments began.

David Rosenberg, chief economist at Merrill Lynch, said the rise in the savings rate showed that “frugality is now replacing frivolity” as consumers sock away part of their stimulus payments.

In other economic news, the Commerce Department reported that orders to U.S. factories shot up by 1.7 percent in June, the fastest pace in six months, reflecting big increases in petroleum prices and heavy demand for military equipment.

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