- The Washington Times - Friday, August 28, 2009

Consumer spending, which declined during the second quarter, increased modestly in July, fueled largely by the “cash for clunkers” program.

As the economy rebounds from its deepest postwar recession, however, today’s heavily indebted, cash-strapped consumers who have seen their net worth plunge by more than 20 percent are unlikely to play as large a role in the recovery as they have in the past, analysts say.

Consumer spending increased 0.2 percent last month while income was flat, the Commerce Department reported Friday.

Taking advantage of rebates between $3,500 and $4,500, consumers rushed to auto dealers late last month to exchange their gas-guzzling vehicles for more fuel-efficient cars and trucks. New vehicles accounted for about three-fourths of July’s spending increase, estimates Nigel Gault, chief U.S. economist for IHS Global Insight. But consumers restrained their spending elsewhere.

“July income and spending data show how difficult it will be for consumers to generate any sustained spending growth in the near term,” said Scott Hoyt, an economist at Moody’s Economy.com. “Despite a slight increase in wages, personal income growth was negligible, and income remains well below its year-ago level.”

“Cash for clunkers” helped to elevate vehicle sales in July to an 11.2 million annual rate, the most since September. And it pushed up household spending last month by 1.3 percent for durable goods, which are expected to last three years or longer.

However, spending on nondurable goods, like clothing, food and gasoline, declined 0.3 percent last month, reflecting the reluctance of households to spend money without being offered incentives.

“When given sufficient incentive, as in ‘cash for clunkers,’ consumers will spend,” Mr. Gault said. “But reduced wealth, high debt, tight credit and a weakening labor market are all weighing on consumers. Consumers remain the missing link in hopes for a strong recovery.”

Personal income was flat in July after falling 1.1 percent in June. The decline in income in June related mostly to a slowdown in government transfer payments to households. Those payments jumped significantly in May due to the economic-stimulus program, the Commerce Department explained.

With personal income flat and spending up, personal saving declined last month. The personal saving rate fell from 6 percent in May and 4.5 percent in June to 4.2 percent in July.

Income from wages and salaries edged up 0.1 percent in July, the first increase since October.

The recession, which began in December 2007 but deepened during the second half of last year, has taken its toll on spending and income, especially wage-and-salary income. Compared to a year ago, consumption in July was down 1.6 percent, and total personal income has fallen 2.4 percent, according to Commerce Department data. Income from wages and salaries has plunged 5.1 percent since July 2008.

“The main support for spending continues to be the government,” said Mr. Hoyt of Moody’s Economy.com. “Transfer receipts [such as Social Security and unemployment benefits] are the only component of personal income above their year-ago level.”

Inflation remained subdued in July. Prices of consumer goods were unchanged from June, the report showed. And compared to July 2008, prices for goods purchased by consumers fell a record 0.8 percent.

The Federal Reserve’s preferred inflation gauge, which excludes the volatile food and energy sectors, increased just 1.4 percent over its July 2008 level, the lowest annual pace since October 2003 and well within the central bank’s “comfort zone.”

Amid reports that the housing market and manufacturing industry were beginning to stabilize, consumer confidence in August remained essentially unchanged from July, according to the Reuters/University of Michigan index of consumer sentiment.

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