Consumer spending in U.S. rises below forecast on slow wage gain

Consumer spending in the U.S. rose less than forecast in July as income growth slowed, indicating further job gains are needed to sustain household purchases.

Consumer purchases, which account for about 70% of the economy, rose 0.1% after a revised 0.6% increase the prior month that was larger than previously estimated, the Commerce Department reported today in Washington. The median forecast in a Bloomberg survey of economists called for a 0.3% rise. Incomes increased 0.1%, down from 0.3% the previous month.

A bigger pickup in job growth and wage gains are needed to help consumer spending overcome weak global demand. Rising mortgage rates threaten to derail the household purchases of appliances and automobiles that have supported home improvement retailers such as Lowe’s Cos. and Home Depot Inc.

“It’s difficult for consumers to increase their spending” as Americans face “concern about the stability of the labor market, whether they’re going to have their jobs” as well as the need to rebuild savings, said Gus Faucher, senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly projected the rise in incomes. “There is some pent-up demand out there still.”

Stock Prices

Stock-index futures pared earlier gains after the report. The contract on the Standard & Poor’s 500 Index maturing in September rose 0.1% to 1,638.50 at 8:32 a.m. in New York, after rising 0.5% earlier.

Projections on spending ranged from no change to a 0.5% increase in the Bloomberg survey of 74 economists. The June reading previously was reported as a gain of 0.5%. The survey median called for incomes to gain 0.2%.

Gross domestic product grew at a 2.5% annualized rate in the second quarter after a 1.1% gain in the first three months of the year, the Commerce Department reported yesterday. Consumer spending in the second quarter climbed at a 1.8% annualized rate after a 2.3% pace in the first three months of the year, the figures showed.

Adjusting consumer spending for inflation, purchases were unchanged in July compared with a 0.2% increase the previous month, according to today’s report.

The Commerce Department’s price index tied to spending, a gauge tracked by Federal Reserve policy makers, increased 1.4% in July from the same period in 2012. The core price measure, which excludes volatile food and energy categories, rose 1.2% from July 2012.

Job Gains

Faster job gains would help drive the wage increases needed to boost household purchases. Employers probably added 180,000 jobs in August, according to the Bloomberg survey median ahead of the Sept. 6 report from the Labor Department. Hiring gains averaged 197,500 a month in the first six months of this year, up from 180,000 in the second half of 2012.

Higher home prices, which have boosted household net worth, are propelling demand for washers, dryers and other expensive items that Americans were reluctant to buy in the housing downturn, Lowe’s Chief Executive Officer Robert Niblock said last week.

“Our second-quarter sales performance exceeded our expectations, due in part to strong demand for appliances and recovery in our garden department,” Carol B. Tome, chief financial officer at Atlanta-based Home Depot, said on an Aug. 20 earnings call.

Investors have taken note of the improving outlook. The Standard & Poor’s GICS Consumer Discretionary Sector Index, which encompasses companies that tend to be the most sensitive to swings in the economy including Home Depot, has climbed 5.7% through Aug. 28 since April 30. The S&P 500 Index is up 2.3% over the same period.

At the same time, some retailers, such as Target Corp. of Minneapolis, are seeing the demand increase in autos and housing “crowding out spending on other goods and services,” Executive Vice President Kathee Tesija said on an Aug. 21 earnings call.

www.bloomberg.com

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