Saturday, August 29, 1998

Personal income up 0.5 percent in July, but Americans spending less

By ALICE ANN LOVE

Associated Press

WASHINGTON -- Americans held onto more of their rising incomes in July, leaving analysts wondering if a spending spree that has buoyed the United States in the midst of floundering foreign economies is coming to an end.

Personal incomes rose by 0.5 percent in July to a seasonally adjusted annual rate of $7.14 billion -- slightly faster than a revised 0.3 percent gain in June, the Commerce Department said Friday.

But consumer spending, which accounts for two-thirds of the U.S. economy, fell 0.2 percent -- the first drop in two years -- to a seasonally adjusted rate of $5.8 billion. June spending had been up 0.6 percent.

What may be a temporary decline in purchases of motor vehicles accounted for the decrease in July spending, the Commerce Department said. Purchases of other goods and services continued to increase modestly.

Strikes at General Motors, not settled until the end of July, emptied some car dealers' lots, and sales incentives that boosted other auto sales in May and June expired.

"Excluding that, consumption would have been pretty healthy," said Sung Won Sohn, chief economist with Norwest Corp. in Minneapolis. "But the main concern is where we go from here?"

About a quarter of recent consumer spending, which until July had increased every month since June 1996, has been attributable to Americans' stock market winnings, Sohn estimated.

But in the past few weeks, the Dow Jones industrial average has dropped more than 13 percent, including a huge slide of more than 350 points on Thursday, as traders showed fear that lingering financial problems in Asia -- and now a currency crisis in Russia -- will drag down the U.S. economy.

On Friday, the Dow lost an additional 114 points to close for the week at 8051.68.

Consumer confidence also slipped for the second straight month in August, according to a report earlier this week by the Conference Board, a private business research group in New York.

"Consumer spending could slow quite a bit eventually, leading to cutbacks in production and income, making for a meaningful economic slowdown," said Sohn. "This could be the last hurrah for the booming economy."

Indeed, the government reported this week that the gross domestic product -- measuring the total output of American goods and services -- rose at an annual rate of just 1.6 percent from April to June, a dramatic slowdown from a 5.5 percent growth rate in the first three months of the year.

Many analysts note, however, that Americans' buying power remains strong, as their incomes continue to rise faster than inflation.

Wages and salaries, which account for more than half of personal income, rose 0.6 percent in July, reflecting continued low unemployment.

"I see no reason for spending to slacken, especially as we are heading into the prime buying seasons: back to school and the holidays," said William Cheney, chief economist for John Hancock Financial Services in Boston. "Last month's pullback in spending is nothing more than consumers taking a breather."

Most income categories, including service and distributive industry wages, business owners' income, rents and transfer payments such as Social Security were up in July.

But manufacturing wages fell 0.5 percent and farmers' income dropped 5.5 percent, indicating some suffering from less demand for American goods in troubled foreign markets and competition from cheaper imports.

The General Motors strike accounted for about $7.5 billion in lost wages in July and $3.5 billion in June, according to the Commerce Department.

In July, Americans' disposable income -- or income after taxes -- rose 0.5 percent, the same increase as the overall income figure. Combined with lower spending, that pushed the savings rate up to 0.8 percent. Personal savings had fallen to a record low of 0.1 percent in June.