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Americans cut spending in July, save more

MARKETWATCH 8:57 AM ET 08/29/14


WASHINGTON (MarketWatch) -- Consumers cut spending in July for the first time in six months, a surprising drop that could lead to sharply lower third-quarter growth unless outlays rebound quickly.

Consumer spending dropped a seasonally adjusted 0.1% last month, the Commerce Department reported Friday. Economists polled by MarketWatch had predicted a seasonally adjusted 0.1% increase.

The decline in spending was widespread. Consumers bought fewer cars than they did in June and they spent less at department stores and other retailers.

One reason consumers might have spent less: Income growth slowed to a 0.2% gain from 0.5% in each of the prior two months. That was the smallest increase since December.

Consumers also saved more. The savings rate climbed to 5.7% from 5.4% and reached the highest level since the end of 2012.

In any case, the reduction in spending in the first month of the third quarter suggests the U.S. will fall well short of the second-quarter growth rate of 4.2% unless outlays rise much faster in August and September. Before the report, economists polled by MarketWatch were forecasting a 3.1% advance in third-quarter growth.

Many economists, however, do expect rebound in spending. They point to much faster job creation and an array of indicators that appear to suggest the economy is still strengthening. The result should be upward pressure on wages and more money for Americans to spend in the months ahead, they say.

What might also help is a leveling off in inflation. The PCE price index rose a scant 0.1% in July, and the increase over the past 12 months was unchanged at 1.6%. Inflation spiked earlier in the year but has leveled off during the summer.

The core PCE rate that excludes food and energy also edged up 0.1%.

-Jeffry Bartash; 415-439-6400; [e-mail]

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