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The Honolulu Advertiser
Posted on: Tuesday, August 31, 2004

Consumer spending rebounds from June

By Jeannine Aversa
Associated Press

WASHINGTON — Shoppers spent more freely in July, raising hopes that June's economic lull would not last.

The Commerce Department reported yesterday that consumers, key shapers of U.S. economic activity, boosted spending by 0.8 percent in July from the previous month. Their appetite to spend was led by a rebound in demand for big-ticket goods, such as cars, helped by buyers' incentives.

The latest snapshot of buyer behavior marked an improvement from June, when consumers cut spending by 0.2 percent as high energy prices and a sluggish job market weighed on consumers' willingness to spend.

Incentives on cars and discounting of other goods helped to bring buyers back in July.

"Consumers know a deal when they see one and know when to wait for one to show up," said Joel Naroff, president of Naroff Economic Advisors.

The 0.8 percent rise was slightly better than the 0.7 percent increase some economists had expected.

Americans' incomes, the fuel for future growth, nudged up 0.1 percent in July, following a 0.2 percent rise in the previous month. July's income growth fell short of some analysts' calls for a 0.5 percent gain. The 0.1 percent rise matched an increase for November 2002 and was the smallest advance since income growth was flat in August 2002.

Income growth was held back by a decline in government payments — mainly a reduction in the federal matching rate for Medicaid reimbursements, which had been boosted by last year's tax cuts. Wages and salaries, unchanged in June, rose by 0.4 percent in July.

The spending and income figures are not adjusted for price changes.

On Wall Street, the report failed to buoy investors. The Dow Jones industrials lost 72.49 points to close at 10,122.52.

The economy grew at a 2.8 percent annual rate in the second quarter of this year as high energy prices took a toll on economic activity.

That was more sluggish than first thought, marked a slowdown from the 4.5 percent growth rate in the prior quarter, and provided fresh evidence that the economy had a rough go in the early spring and late summer.

Economists believe, however, that the economy is picking up its pace in the third quarter, with estimates for growth ranging from a rate of around 3 percent to just topping a 4 percent pace.

Consumer spending accounts for roughly two-thirds of economic activity in the United States. Hence its important role in shaping the economy.

Some economists said yesterday's report suggested that consumer spending in the current quarter got off to a good start.

Mark Vitner, economist at Wachovia, is estimating consumer spending will grow at a 3.2 percent annual rate in the third quarter, which would be an improvement from the second quarter's lackluster 1.6 percent pace.

Stuart Hoffman, chief economist at PNC Financial Services Group, is a bit wary.

"Consumers are hanging in there, but the momentum is not strong," he said.