Consumer spending boosted slightly by 'clunkers' program; income and inflation flat in July

There were no morsels for the inflation hawks to nibble on in July's personal income and consumer spending report. Both income and inflation were flat, while consumer spending rose 0.2 percent, the U.S. Commerce Department announced Friday.

Economists surveyed by Bloomberg News had expected personal income to rise 0.1 percent and inflation to be flat in July; the survey also expected consumer spending to rise 0.3 percent. The U.S. savings rate did fall in July to 4.2 percent from 4.5 percent in June, but that's still well above the rate for the previous expansion, when the savings rate went negative -- meaning Americans actually spent more money than they earned.
Some economists say the U.S. has entered a "frugal consumer" era to make up for previous overconsumption and depleted nest eggs. And so far in 2009, that's been the case, with the savings rate remaining above four percent.

"Clunkers" program boosts spending

The 0.2 percent consumer spending rise was led by increased spending for autos and other durable goods. The federal government's "cash for clunkers" vehicle program most likely boosted spending, but government statisticians say it will be several months before they can determine the specific impact of the clunkers program on spending.

Further, real consumer spending is up 0.3 percent in the past three months, but it's still down 1.6 percent since the recession started in December 2007 -- a stat that reveals the smaller consumption component of U.S. GDP.

No wage, inflation pressure

Further, income from wages and salaries increased 0.1 percent in July -- the first increase since August 2008 -- a statistic that shows how little wage pressure there is in a U.S. economy coping with high unemployment and low output. What's more, wage and salary income has dropped 4.7 percent in the past 12 months: that's the worst 12-month wage decline since 1948.

Another indicator of purchasing power -- real disposable income -- is up 0.7 percent since the end of Q1, but is still down 3.5 percent since May 2008, the peak reached during the previous economic expansion.

Meanwhile, inflation hawks will have a hard time arguing that the U.S. government's record monetary and fiscal stimulus has led to 1970s-style, Argentinian runaway inflation in the U.S.: consumer prices were flat in July. Further, core prices, which exclude the often-volatile food and energy component, rose 0.1 percent.

Moreover, in the past year, consumer prices have fallen 0.8 percent, while the core rate has risen just 1.4 percent. Each 12-month rate is well within the U.S. Federal Reserve's "comfort zone" for inflation.

Economic Analysis: A bitter/sweet July income and consumer spending report. From an investor standpoint, the lack of wage pressure and inflation is good news, but keep in mind that if the consumer portion is to remain a key component of U.S. GDP, incomes will need to rise for corporate revenue and earnings to advance at healthy rates.

Historically, consumer spending accounts for 60-65 percent of U.S. GDP, but it remains to be seen whether that percentage will hold in a restructured U.S. economy.

Meanwhile, the lack of inflation is good news for investors and policy makers, alike: it will enable the Fed to extend its accommodative monetary policy for a longer period of time, which will help ensure a sustained expansion.

Also, the high savings rate is beneficial, long-term, as it will increase the supply of capital available for investment -- and help rebuild Americans' nest eggs. Short-term, however, it takes dollars away from consumption, and will reduce GDP slightly.
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