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Indicators: U.S. consumer spending rises 0.5 percent in August, new home sales slide

Consumer spending rose 0.5 percent in August after

Consumer spending rose 0.5 percent in August after showing no gain in July, the U. S. Commerce Department reported Monday. Frances Gurley shops at a Family Dollar store in Wilmington, N.C. on Sept. 4, 2014. Credit: AP

WASHINGTON - Americans boosted spending by a healthy amount in August, another indication that the economy is getting on solid footing heading into the final quarter of the year.

Consumer spending rose 0.5 percent in August after showing no gain in July, the U.S.Commerce Department reported Monday. About half of the increase was driven by auto sales. It was the best result since spending also expanded 0.5 percent in June.

Helped by strength in wages and salaries, income rose a modest 0.3 percent in August, slightly faster than a 0.2 percent July increase.

The spending gain was another sign that the economy is maintaining strength in the current July-September quarter. Consumer spending accounts for about 70 percent of economic activity, and the slowdown in July had raised concerns about whether the economy would retain the momentum it showed in the spring after a harsh winter.

With spending rising at a faster pace than income, the saving rate dipped slightly to 5.4 percent of after-tax income. The figure was down slightly from a saving rate of 5.6 percent in June, which had been the highest monthly rate since December 2012.

Inflation was well contained in August, with an inflation measure tracked closely by the Federal Reserve showing no change after a 0.1 percent July increase. Over the past 12 months, this measure of inflation is up just 1.5 percent, well below the Fed's 2 percent target.

About half of the spending growth came from a big increase in car sales in August. That helped push durable goods purchases up 1.8 percent in August after no change in July. Sales of nondurable goods actually fell 0.3 percent in August, a decline that likely reflected falling gas prices. Spending on services including utilities and rent rose 0.5 percent in August.

The government on Friday reported that the overall economy as measured by the gross domestic product grew at a rapid 4.6 percent annual rate in the April-June quarter, a significant rebound after the economy had gone into reverse in the first quarter.

Many expect that the momentum created in the spring will keep activity rising at a solid pace for the rest of this year and into 2015. The latest outlook from top forecasters with the National Association for Business Economics predicts the economy will grow at a 3 percent rate in the second half of this year and will average 3 percent in 2015, which would give the country its strongest annual growth rate in a decade.

Since the recession ended five years ago, growth has averaged a lackluster 2 percent. The optimism for a breakout to higher growth stems on the belief that rising employment will generate growing incomes, which would then support more consumer spending. In addition, the significant drag from cutbacks in government spending and higher taxes are beginning to wane.

Responding to stronger job growth, consumer confidence rose in September to 84.6, the highest point in 14 months and the second highest level in the past seven years.

The Federal Reserve is continuing to pursue its ultralow interest rate policies as a way to make sure that the forecasts for stronger growth are not suddenly derailed by rising borrowing costs. At its last meeting two weeks ago, it retained language that it expected to keep rates low for a "considerable time," which was seen as a strong signal by many economists that its key short-term interest rate will remain at a record low near zero until next summer.

The Fed has been able to maintain low rates because inflation has remained well below the Fed's 2 percent target.

Home sales dip in August

The National Association of Realtors said Monday that its seasonally adjusted pending home sales index fell 1 percent over the past month to 104.7. Higher prices and weak wage growth has limited buying, as the index is 2.2 percent below its level from a year ago.

The five-year recovery from the Great Recession has been uneven, such that historically low mortgage rates have failed to propel buying back to usual levels. Price increases going back to 2013 have led to fewer homebuyers, while many families have lacked the income to save for down payments. Investors making all-cash offers on homes have also begun to retreat, reducing the total number of sales.

Pending sales are a barometer of future purchases. A one- to two-month lag usually exists between a contract and a completed sale.

The Realtors project that 4.94 million existing homes will be sold this year, down 3 percent from 5.09 million in 2013. Analysts generally associate sales of roughly 5.5 million existing homes with a healthy market.

August contracts fell in all four geographical regions — Northeast, Midwest, South and West — compared to the prior month. The index had registered overall gains in four of the previous five months.

Combined with homebuilders catering to higher-income buyers instead of the mass market, the contracts index points to trivial improvements in home sales in September.

"We hope this lost ground will be recovered gradually, but with investors disappearing from the market and homebuilders gaining market share from private sellers, it will take time," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The housing rebound started to struggle in the middle of 2013. Mortgage rates started to rise from historic lows, even though they remain below their historic averages. Fierce winter storms delayed construction and slowed foot traffic at open houses at the beginning of 2014. Sales, however, never quite showed much strength during the summer buying season because wage growth has been so modest coming out of the downturn.

Purchases of existing homes fell 1.8 percent to a seasonally adjusted annual rate of 5.05 million in August, the Realtors said last week. Sales fell from a July rate of 5.14 million, a figure that was revised slightly downward.

New-home sales did show greater strength in August, but they continue to be below the 1990s pace of more than 700,000 sales a year.

Sales of new homes climbed 18 percent last month to a seasonally adjusted annual rate of 504,000, although much of the gains were concentrated in the West. More importantly, 28 percent of the new homes sold in August cost more than $400,000, compared to just 18 percent a year earlier.

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