Consumer Spending Jumped in July

WASHINGTON (Reuters) — Consumer spending rose at its fastest rate in five months in July, easing concerns that the economy was falling back into recession.

Consumer spending increased 0.8 percent on strong demand for motor vehicles as Japan-related supply restraints faded, a Commerce Department report showed Monday. Spending slipped 0.1 percent in June.

The size of the increase in spending beat economists’ forecasts for a 0.5 percent advance. When adjusted for inflation, spending was up 0.5 percent last month, the largest gain in 1 1/2 years and the first increase since April.

“It’s a little far-fetched to truly believe that we are headed into another recession. This data doesn’t support that view at all,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa.

The spending data was the latest to suggest the economy started the third quarter with some strength after growth slowed to a near halt in the first half of the year.

But the risks of a new recession have risen this month as stock prices plunged and consumer sentiment eroded.

The spending report showed inflation-adjusted after-tax incomes fell in July, while data from the Dallas Federal Reserve Bank indicated factory output in Texas ground to a near halt this month.

The Texas factory index dropped to 1.1 from 10.8 in July, while a business confidence gauge slid to –11.4 from –2.0. The decline in sentiment was in line with other recent regional manufacturing surveys. In those indexes, zero is the dividing line between growth and contraction.

Separately, the number of contracts signed for purchases of previously owned homes fell 1.3 percent last month, according to the National Association of Realtors.

Pending home sales usually lead existing home sales by a month or two, and the decline in signed contracts pointed to a fall in August sales.

So far data from industrial production to retail sales and employment has been consistent with a slow-growth situation rather than an outright contraction in economic output. Data for August will give an idea of how much damage the stock market turmoil inflicted on the already wounded economy.

The economy grew at a tepid 1 percent annual rate in the second quarter, with consumer spending rising at its weakest pace since the fourth quarter of 2009. The economy expanded 0.4 percent in the first three months of the year

The Fed chairman, Ben S. Bernanke, left the door open for further monetary stimulus in a speech on Friday in which he said bringing down the high level of joblessness was crucial to ensuring the economy’s long-term health.

Although the spending report showed core inflation moving higher, analysts did not think this would tie the central bank’s hands.

The core personal consumption expenditures price index — which strips out food and energy costs — rose 0.2 percent for a second straight month, taking the year-on-year reading to 1.6 percent, the highest since May 2010, from 1.4 percent in June.

Over all, inflation jumped 0.4 percent in July after dropping 0.1 percent in June.

“This does not rule out additional Fed stimulus when policy makers meet in September. But it doesn’t exactly rule it in,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

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