Sun, Oct 02, 2011 page11

• Weak income curbs US spending

  RAINY DAY: Savings in August fell to their lowest level in nearly two years as consumers tapped these funds to keep spending, although analysts say this is unlikely to continue

  • Reuters, Washington
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  US consumers struggled to make ends meet in August as incomes fell for the first time in nearly two years, while a surge in Midwest manufacturing last month provided one bright spot in an otherwise weak economy.

  Spending, the major driver of US growth, was flat in August when adjusted for inflation as consumers grappled with falling incomes, US Commerce Department data showed on Friday. Incomes fell 0.1 percent, the first drop since October 2009.

  However, the sting from the weak spending report was softened by the strength in manufacturing in the Midwest last month and news that consumers grew more optimistic as the month ended.

  “While the economy is not growing quickly, neither is it falling off the table and that matters because markets have already priced in a recession,” said John Canally, an economist at LPL Financial in Boston.

  Consumer spending accounts for about 70 percent of US economic activity and has softened all year, so the flat inflation-adjusted reading for spending in August added to a picture of shaky GDP growth. Spending rose 0.2 percent without accounting for inflation.

  Poor household finances are hurting profits at some major consumer product companies, such as Best Buy, where customers are steering clear of big-ticket items.

  “We’re still facing an uncertain macro environment with volatile consumer shopping behavior,” Best Buy CEO Brian Dunn said earlier last week.

  The data on Friday had little impact on US financial markets, with stocks on Wall Street falling as investors worried a contraction in China’s manufacturing could deepen the slowdown in the global economy.

  Prices for US government bonds rallied sharply, while the US dollar rose against a basket of major currencies, largely on risk aversion.

  Although the nation’s manufacturing, which has shouldered the recovery, is cooling nationwide, it is doing so at a less rapid pace and showed surprising strength in the Midwest. Businesses continue to invest in machinery, which should help the economy to skirt a new recession.

  The Institute for Supply Management-Chicago’s business barometer rose to 60.4 from 56.5 in August. Economists had expected it to decline to 55.5. A reading above 50 indicates expansion in the regional economy.

  That suggests a modest slowdown in national factory -activity, when the Institute for Supply Management releases its survey of national manufacturing for last month tomorrow.

  With the economy failing to create jobs in August, people in the US turned to their savings to fund purchases.

  Incomes are also being stretched to cover rocketing health insurance costs. A Kaiser Family Foundation survey last week found annual family premiums this year growing at a pace triple that of last year.

  Savings in August fell to their lowest level since December 2009. Economists said it was unlikely households would continue to draw down on their savings to keeping spending.

  “It seems very unlikely that consumers can lead the economy to a faster recovery pace. The consumer needs job growth,” said John Ryding, chief economist at RDQ Economics in New York. “Higher inflation continues to hurt consumers as price increases outstrip gains in wage incomes.”

  The income report showed year-over-year inflation pressures still elevated, with the personal consumption expenditures price index rising 2.9 percent, the largest gain since October 2008, after advancing 2.8 percent in July.

  The core index, which is closely watched by US Federal Reserve officials, increased 1.6 percent in the 12 months through August after rising by the same margin in July.

  The Fed recently announced a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet in an effort to stimulate growth.

  Fed Chairman Ben Bernanke said last week the US central bank might need to ease monetary policy further if inflation or inflation expectations fell significantly.

  “Higher inflation is being ignored by the Fed. Without job growth there is no income power, and without income power higher inflation erodes the prospects for stronger growth,” said Eric Green, chief economist at TD Securities in New York.
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