Consumer Spending Slips; Savings Highest in 1½ years

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Consumer Spending Slips as Savings Rises to Highest in 1.5 years
LM Otero/AP
By Lucia Mutikani

WASHINGTON -- consumer spending unexpectedly fell in July as savings rose to its highest level in more than 1½ years, indicating that households remain cautious despite an acceleration in economic growth.

The Commerce Department said Friday consumer spending dropped 0.1 percent last month, the first decline since January, after an unrevised 0.4 percent gain in June.

Economists had expected consumer spending, which accounts for more than two-thirds of U.S. economic activity, to increase 0.2 percent in July. When adjusted for inflation, it slipped 0.2 percent after gaining 0.2 percent in June.

The weakness in consumer spending at the start of the third quarter will probably do little to change perceptions that the economy has retained much of its second-quarter momentum.

Other sectors of the economy such as housing, business spending, exports and government activity are accelerating. In addition, labor market conditions are strengthening.

The dollar fell against a basket of currencies after the data. U.S. stock index futures were trading higher.

The government reported Thursday that the economy expanded at a 4.2 percent annual pace in the second quarter, with consumer spending growing at a 2.5 percent pace.

Third-quarter growth estimates currently range as high as a 3.6 percent rate.

Savings increased to $739.1 billion in July, the highest level since December 2012, from $709.4 billion in June. At 5.7 percent, the saving rate was also the highest since December 2012. The increase in savings came even as income posted its smallest increase since December.

Muted Inflation

While rising savings bode well for future spending, confidence among households will probably need to increase significantly for spending to pick up.

With consumption weak, inflation pressures were muted in July, giving the Federal Reserve room to keep its benchmark overnight lending rate near zero for some time while it awaits an acceleration in wage growth.

A price index for consumer spending edged up 0.1 percent after increasing 0.2 percent in June. That was the smallest rise since February. In the 12 months through July, the personal consumption expenditures, or PCE, price index rose 1.6 percent. It also increased by 1.6 percent in June.

Excluding food and energy, prices inched up 0.1 percent after rising by the same margin in June.

The so-called core PCE, which is the Fed's favorite inflation measure, increased 1.5 percent in the 12 months through July, continuing to run below the U.S. central bank's 2 percent target. It had advanced 1.5 percent in June.

Last month, income increased 0.2 percent after rising 0.5 percent in June. Income at the disposal of households after adjusting for inflation and taxes nudged up 0.1 percent after increasing 0.3 percent in June.

6 Financial Issues to Tackle in the Fall
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Consumer Spending Slips; Savings Highest in 1½ years
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won't be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don't leave any money on the table.
Back-to-school time can be expensive if you're not prepared. Money is spent on clothes, books, supplies and technology -- and that's before the doors to the classroom have even opened. Before hitting the stores, do these two things:
  • Conduct an online search for "coupon code" along with the name of any store you'll be shopping at. Typically you can find some great online deals.
  • Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can't get child's "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
It's hard to think about the holidays when we're just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there's room in your cash flow to allow for an increase to possibly max out by year end.
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they're panning out. If you're recently married and haven't already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you've moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
If you're lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
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