Reports Confirm Brisk Economic Momentum in the 3rd Quarter

WASHINGTON — Consumers boosted spending in July at the sharpest rate since the start of the year, the Commerce Department said Friday, as new-home sales held at high levels and a key Midwest gauge of manufacturing picked up steam in August.

Analysts said the reports confirm that economic momentum in the third quarter is brisk, though so far with only scattered signs of potentially inflationary price rises that might worry Federal Reserve Board policymakers.

The Commerce Department said spending on goods, from new cars to newspapers, and on all types of services jumped 0.8% last month, to a seasonally adjusted annual rate of $5.49 trillion.

That was the fastest monthly spending pickup since a 1.1% increase in January and overshadowed June’s modest 0.2% gain. New-car sales were especially strong last month, stimulated by price discounting and financing incentives.

Income from wages, salaries and all other sources such as rents and interest were up a scant 0.1% to an annual rate of $6.87 trillion--the smallest rise in nine months since a 0.1% fall last October--following a 0.6% June pickup.

In a separate report, the Commerce Department said sales of new homes increased in July for a third straight month, rising 0.9% to a seasonally adjusted annual rate of 817,000. That was contrary to expectations for a small decline in sales.

Analysts said a robust housing market for both construction and sales will support a spending rebound as consumers buy more furniture, home furnishings and appliances.

Meanwhile, the Purchasing Management Assn. of Chicago said its Chicagoland Business Barometer showed Midwest industrial activity on the upswing. It rose to 64.3 in August from 60.6 in July.

Paul Huard, vice president of the National Assn. of Manufacturers, said July’s surge in consumer spending might be short-lived because incomes are not keeping pace. He predicted that moving into the second half of the year, strong consumer spending will be offset by a decline in inventories and a larger trade deficit.

“A 3% GDP [gross domestic product] growth rate will not be enough to ignite inflationary pressures,” Huard said.

Personal savings suffered in July, dropping to 3.7 cents out of each dollar earned, the weakest since February, when the savings rate also was 3.7%. The June rate was 4.3%.

Economist Lynn Reaser of Barnett Banks Inc. in Jacksonville, Fla., said it is significant that the Chicago purchasing managers indicated production was still rising despite a buildup in business inventories reported Thursday by the Commerce Department.

“These reports combined indicate an economy that still is quite strong in the third quarter and that appears to have considerable momentum,” Reaser said.

“It’s not clear yet that it is overheating or running above potential, but the risk remains that growth may be too strong to be sustainable,” she said, adding that there are no signs yet that companies are able to pass on commodity-price increases to final retail prices, which could fuel inflation.

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Personal Income

Seasonally adjusted annual rate, in trillions of dollars:

July: $6.87

Source: Commerce Department

Personal Spending

Seasonally adjusted annual rate, in trillions of dollars:

July: $5.49

Source: Commerce Department