Consumer Spending Jumped in July on Car Sales and Cooling

Consumer spending exceeded forecasts in July, with purchases rising 0.8%, the biggest one-month gain since February, after declining 0.1% in June, according to a Commerce Department report released Monday. The report also shows that incomes grew 0.3% in July, pushing average savings to a four-month low as people spent more money on buying new cars and cooling their homes.

The gain in incomes in July was 0.1% higher than the upwardly revised June figure, while wages and salaries rose 0.4% in July after increasing only 0.1% in June. The savings rate fell to 5%, its lowest level since March, because spending rose more than incomes. The savings rate was 5.5% in June.

Cars sold at their fastest pace in three months in July as supply recovered from Japan’s March earthquake. With July temperatures “above normal” or “much above normal” in 41 of the 48 contiguous U.S. states, according to the National Climatic Data Center, outlays on services, including utilities like electricity and gas, rose at the fastest pace since December 2009.

Vehicle sales rose to a 12.2 million seasonally adjusted pace in July, up from 11.4 million in June, though below the average pace of 12.6 million for the first half of 2011. General Motors (NYSE:GM) deliveries rose 7.6% year over year in July. Meanwhile, retail sales also exceeded expectations. Purchases at Macy’s (NYSE:M) rose 5% while Limited Brands (NYSE:LTD) purchases rose 6%.

The Commerce Department’s report also shows that inflation increased 2.8% annually, while core inflation, which excludes food and fuel, rose 1.6% year over year in July. Spending adjusted for inflation, which is used to calculate gross domestic product, rose 0.5%, the biggest gain since December 2009. Price-adjusted purchases of durable goods rose 2%, while outlays on services rose 0.5%.

However, the trend may not continue, as consumer confidence has plummeted this month. “Income and spending grew at a healthy pace in July, but it was before the confidence shock hit in early August, so it doesn’t tell us much about what spending will look like,” said Michelle Meyer, a senior economist at Bank of America (NYSE:BAC) in New York.

After reporting newly-lowered profit projections for fiscal 2011, Lowe’s (NYSE:LOW) chairman and CEO Robert A. Niblock said, “Recent headlines regarding slowing growth and the U.S. credit rating downgrade underscore the continued weakness in the U.S. economy…The volume of negative news and the unsettling impact on equity markets is having a significant effect on an already fragile consumer mindset.”

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