Consumer spending surges by largest amount in nearly 8 years in August but incomes lag

Consumer spending jumps 1.3 percent in August

WASHINGTON — Consumer spending, propelled by the wildly popular Cash for Clunkers auto sales program, shot up in August by the largest amount in nearly eight years even though personal incomes continued to lag.

The Commerce Department said Thursday that consumer spending rose 1.3 percent in August, even better than the 1.1 percent gain that had been expected. Incomes, the fuel for future spending gains, continued to lag, edging up 0.2 percent in August, the same as the July increase.

The big jump in consumer spending, which accounts for 70 percent of total economic activity, is a good indication that the economy was returning to positive growth this summer. But economists are worried that any rebound from the recession could falter if income growth does not improve.

The government had reported Wednesday that the overall economy, as measured by the gross domestic product, was shrinking at an annual rate of 0.7 percent in the April-June quarter, the fourth straight quarterly decline as the nation continued to be battered by the longest recession since the 1930s.

The strong increase in spending in August, which followed a 0.3 percent rise in July, sets the stage for a return to positive growth in the third quarter. Many economists believe the GDP grew at an annual rate as high as 3 percent to 3.5 percent in the summer and should maintain growth at that level in the final three months of this year.

However, they are worried that growth could slip to a much more sluggish pace next year as the impact of government stimulus programs lessens and households continue to be battered by rising unemployment and a variety of other problems.

The big jump in spending and much weaker gain in incomes translated into a big drop in the savings rate. Personal savings in August fell to 3 percent of after-tax incomes, down from 4 percent in July. That was still nearly double the savings rate of a year ago and economists believe the savings rate will keep trending higher as households try to repair investment savings shredded by the recession.

Incomes looked even weaker after adjusting for inflation. Real disposable incomes, which adjust for inflation and required tax payments, edged down 0.2 percent in August, the third straight monthly decline.

The 1.3 percent rise in consumer spending in August was the biggest increase since a 2.8 percent surge in October 2001, a rise that reflected auto incentives put in place to jump-start activity following the Sept. 11, 2001 terrorist attacks. Taking out the effects of inflation, spending showed an increase of 0.9 percent, also the largest gain since October 2001.

Many economists believe that spending will slump in September, reflecting the fact that the Cash for Clunkers program, which offered car buyers up to $4,500 to trade in their old vehicles for fuel efficient cars, ended in late August.

Paul Dales, an economist at Capital Economics in Canada, said that he believed the big dip in the savings rate was only temporary, reflecting the rush to buy cars. He said the savings rate could rise as high as 8 percent in coming months as households continue to recoup from the severe loss of wealth they suffered during the recession and last year’s stock market plunge.

“This suggests that beyond the next few quarters, consumption growth will remain weak, undermining the sustainabily of the economic recovery,” he said in a research note to clients.

Inflation, as measured by a gauge tied to consumer spending, showed a 0.3 percent rise in August, but that reflected higher energy costs. Excluding food and energy, this inflation gauge edged up just 0.1 percent and is 1.3 percent higher than a year ago, well within the comfort zone for the Federal Reserve, meaning that the central bank can continue to keep a key interest rate at a record low to spur an economic rebound.