July Income, Spending Rise, But Savings Rate Declines

Incomes and consumer spending continued to rise in July, and the savings rate continued to fall, the government reported Friday.

The July rise in incomes, a driving force behind the U.S. economy, was the seventh straight monthly gain. Incomes grew 0.2% in July, down from a 0.7% rise in June. But some economists said that income growth was stronger than the data suggest.

They argued that the July number was not indicative of the overall trend. Greg Jones, chief economist at Briefing.com in Jackson, Wyo., said the 0.2% growth rate reflected a decline in farm income, which was high in June because of government disaster-relief subsidies. Mr. Jones said the distortion caused by the subsidies "is hiding a strong trend" in incomes.

"Until we see evidence that income is slowing, or the stock market failing, spending is going to continue to be strong," he said.

In terms of the raw data, the July increase was the smallest since December, when income was unchanged from November. In another category, disposable income, the money left over after taxes, increased 0.1% in July after rising 0.7% during June.

Regarding spending, the Commerce Department reported an increase of 0.4% in July, after a gain of 0.3% a month earlier. The rise in consumption was paced by a 0.6% rise in money spent on utilities and other services. Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp. in New York, said the overall strength was due in part to increased use of electricity "as air conditioning use was boosted by the summer heat wave."

Spending on nondurable goods rose 0.1%, and durable goods rose 0.2%, the Commerce Department said. Consumer spending accounts for about two-thirds of U.S. output and has been driving the economy toward its longest-running expansion ever. The government said that spending rose at a 4.6% annual rate in the second quarter as the overall economy grew at a 1.8% rate.

Analysts said they expect growth to accelerate during the second half, keeping the economy on course to set a record for its lengthiest expansion.

Savings, on the other hand, declined. The savings rate came in at minus-1.4%, compared with minus-1.1% in June. The savings rate is measured by subtracting taxes and spending from incomes.

The rate accounts for neither capital gains from investments nor improvement in home values, which consumers may be counting on to support future spending, such as during retirement.

Also, the report assumes that items bought on time and paid off in two or three years are bought in one day with cash. That is why many economists say they believe Americans are saving more than the statistics indicate.

"Job creation continues at a pace well above labor force growth, so consumers can keep spending out of current income," said Don Hilber, an economist at Wells Fargo & Co. in Minneapolis, before the report was issued.

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