Credit Commentary

Income remains flat for month of July

By Administrator on Monday, August 31 2009

Americans’ incomes were essentially flat last month and, except for the “cash for clunker” program, so was their spending, the Commerce Department reported Friday. After falling 1.1% from May to June, personal income in July rose less than 0.1%, slightly less than economists had expected.

Personal spending rose 0.2%, marking the third monthly rise. But the uptick was all due to a subsidy-fueled jump in auto sales at the end of July. The federal “cash for clunkers” program guaranteed a high trade-in value for old gas guzzlers if people bought a new fuel-efficient car.

While some consumers have pared their spending because their pay hasn't kept pace with their expenses or because they're using more money to save or reduce debt. Personal incomes were unchanged in July, the Commerce Department said Friday. It was the eighth month out of the past 10 in which incomes have either fallen or failed to grow.

Sluggish consumer spending has been hard on retailers, especially for big-ticket purchases. Home Depot and Lowe's said in their latest earnings reports that consumers are buying smaller items, such as lawn and garden products, but holding back on major remodeling projects. Other retailers say shoppers are buying mainly basics like jeans. That trend has helped lower-priced chains but hurt other higher-priced stores.

With incomes remaining unchanged in July even as spending rose, the personal savings rate dipped: The savings rate fell to 4.2% in July from 4.5% in June, as cash for clunkers prompted people to spend. That trend is likely to continue through August, but many economists expect the savings rate to gradually move upward over the long run. The savings rate has been rising in recent months, after having sunk below 1% in early 2008. More people, facing layoffs, falling home equity and shrunken investment portfolios, are struggling to rebuild nest eggs.

Taxes rose in July, which caused disposable income (personal income minus taxes) to fall slightly. Accounting for inflation, it fell 0.1%.

Also, for the current July-September quarter, economists have been revising their growth forecasts higher. The gross domestic product, the country's total output of goods and services, shrank at an annual rate of 1 percent in the April-June quarter, the government estimated this week. It was the fourth straight quarterly decline, the longest stretch on records dating to 1947.

Outside of the clunkers program, consumer spending was still weak, underlining the challenges to an economic recovery. About three-quarters of the spending increase came from outlays for new vehicles. Economists expect the program to register a similar effect for August.