Incomes drop sharply, spending drags in July

Consumer spending slowed to a crawl and personal incomes plunged in July, reflecting the waning impact of $93billion in economic stimulus payments.

Friday's Commerce Department report showed consumer activity got off to a shaky start in the third quarter, raising new worries that the economy could falter in coming months because of rising unemployment, a continuing credit crisis and a deep housing slump.

Personal incomes fell by a bigger-than-expected 0.7 percent in July, the biggest drop in nearly three years, while consumer spending edged up 0.2 percent, just one-third the 0.6 percent gain in June.

The report showed that the June and July spending figures were skewed by a huge jump in inflation. An inflation gauge tied to consumer spending rose over the past 12 months by 4.5 percent, the biggest price jump in 17 years, led by higher costs for energy and food. Without the big jump in prices, consumer spending would have fallen by 0.4 percent last month after dropping 0.1 percent in June, underscoring just how weak current activity is.

Thursday, the government reported the overall economy, as measured by the gross domestic product, rose by 3.3 percent in the April-June quarter, a big rebound from growth of 0.9 percent in the first quarter.

The second-quarter rebound reflected strong growth in exports and the impact of the stimulus payments, which totaled $93.4billion through August. The mass mailings of payments ended in mid-July with only small batches remaining.

Economists worry that with the payments fading, consumer spending, which accounts for two-thirds of economic activity, also will falter.

Other economists were not as pessimistic, saying that if gas prices continue to fall, consumers could spend more on other items. The price drop since gas hit a record at $4.11 per gallon in mid-July has helped to lift spirits. The Reuters/University of Michigan consumer sentiment survey showed confidence posted a reading of 63 in late August, up from 61.7 earlier in the month.

The consumer spending report showed personal savings totaled 1.2 percent of after-tax incomes in July, down from a rate of 2.5 percent in June.