TOPICS > Economy

Consumer Spending Rises Slightly, But Confidence Falls Again

BY Anna Shoup  August 28, 2009 at 12:00 AM EDT

Question mark in a shopping mall; Flickr photo via wok/ Creative Commons

Consumer spending, which makes up around 70 percent of economic activity in the United States, rose 0.2 percent in July, the Commerce Department reported.

But with household incomes remaining flat after a decline of 1.1 percent in June, there may not be much additional disposable income to boost consumer spending enough to encourage a strong recovery.

The government’s popular “cash for clunkers” program that gave up to $4,500 to car owners to trade in older cars for more fuel-efficient ones helped to boost overall spending in July.

“For the consumer, it’s been just a great program. They were probably going to see perhaps some record sales through this,” said Geoff Pohanka of the Pohanka Automotive Group on the NewsHour. “Sales, new car sales throughout the United States will be up substantially. And what’s interesting through this, it’s stirred up the market.

Spending on durable goods, including cars, rose 1.3 percent in July but nondurable goods sales fell 0.3 percent.

Still, even a slight rise in consumer spending could be a good sign.

“That puts us in pretty good stead for an upturn in consumer spending in the third quarter,” said David Resler, chief economist at Nomura Securities International in New York, as quoted by Reuters.

In a separate report, the Reuters/University of Michigan Surveys of Consumers, found that consumer confidence fell to 65.7 in August, its lowest level in four months.

“Investors still have to be worried about the sustainability of the recovery. It’s clear to me that we cannot count on growth through next year as long as consumers are still on the ropes,” said Christopher Low, chief economist at FTN Financial in New York, as quoted by Reuters.

Spending habits are a closely-watched indicator of the health of the economy and economists are looking to see if weak consumer spending could slow economic recovery. The pace of layoffs is slowing, however, but companies are still not hiring. The national unemployment remains high at 9.4 percent in July and without a rise in income or home prices, many households are still feeling crunched.

The weak demand from consumers has helped to keep inflation in check, though there may be problems down the road when the economy begins to recover because of the influx of government money into the economy, according to Craig Hester, chief executive officer at Hester Capital Management in Austin, Texas.

The personal savings rate dipped to 4.2 percent, down from 4.5 percent in June. A year ago, it was 2.6 percent. That is expected to rise even more as consumers work to rebuild their retirement funds. A rising savings rate could hamper recovery as well by keeping consumer spending at low levels.

On Thursday, the Department of Commerce reported that GDP contracted by 1 percent in the second quarter of the year. The decline was less severe than the 6.4 percent decrease in the first quarter but was the fourth consecutive decline. The traditional definition of a recession is two consecutive quarters of GDP decline.