Fearful Consumers Cut Spending in August

Consumers, whose spending had been THE driver of this economy, shut their wallets in August.

From Reuters (hat tip reader Brian):

Consumers facing rising unemployment kept their spending unchanged in August even though incomes rose, according to a government report Monday that showed optimism about the economy’s direction was fading.

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July’s revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain.

Incomes were boosted early this year by payments made under an economic stimulus program but that has largely worn off.

“Consumers seem to have hit the foxholes,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, adding that he hoped a proposed $700-billion bailout package that Congress is voting on for U.S. financial firms may relieve some uncertainty about the future.

Consumer spending on goods and services fuels about two-thirds of U.S. economic activity so the economy is widely predicted to slow in coming quarters. In the second-quarter report on gross domestic product issued last Friday, consumer spending already was revised down to a 1.2 percent annual rate from 1.7 percent and is likely to keep losing momentum.

“It looks like we are poised to see a real-term decline in personal consumption and that will likely result in a negative GDP number in the third quarter,” cautioned James O’Sullivan, economist at UBS Securities in Stamford, Connecticut….

The income and spending data had no impact on financial markets, which still were grappling with news of another U.S. bank merger and with details of the huge taxpayer-financed bailout program for U.S. financial firms….

Despite higher August incomes, consumers facing higher prices for gasoline and other items were unable to save more. The personal savings rate dropped to 1 percent from 1.9 percent in July.

Meanwhile, the report pointed to persistent inflation pressures. The personal consumption expenditures index on a year-over-year basis rose 4.5 percent in August, only barely below the 4.6 percent rise posted in July. Core prices that exclude food and energy were up 2.6 percent — the highest rate since the beginning of 1995.

With inflation rising, the August report means in inflation-adjusted terms, spending fell. So the contraction was into a more serious leg down before the credit crisis became more acute.