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 Another report on Friday showed a sharp acceleration in factory
activity in the Midwest this month, a further sign the economy
remains on solid ground.
"The weakness in spending will quickly subside this fall as consumer
confidence is supported by record highs in the stock market, rising
housing prices and improving labor market conditions," said Michael
Woolfolk, global markets strategist at BNY Mellon in New York.
Consumer spending, which accounts for more than two-thirds of U.S.
economic activity dipped 0.1 percent last month after rising 0.4
percent in June, the Commerce Department said. Economists had
expected a 0.2 percent gain.
When adjusted for inflation, it fell 0.2 percent.
Spending was weighed down in part by a decline in automobile
purchases and a weather-related drop in demand for utilities.
The weakness in spending prompted some economists to lower their
forecasts for third-quarter economic growth. Goldman Sachs cut is
projection by two-tenths of a percentage point to a 3.1 percent
annual rate. Forecasting firm Macroeconomic Advisers cut its
forecast by a similar amount, taking it down to 2.9 percent.
The economy grew at a 4.2 percent annual rate in the second quarter,
with consumer spending advancing at a 2.5 percent rate.
Despite the tempering of expectations, economists expect another
relatively sturdy quarter given the rise in confidence, a
strengthening labor market, and gains in manufacturing and business
spending. Housing and government spending are also on the mend.
The Thomson Reuters/University of Michigan's consumer sentiment
index increased to 82.5 in August, the highest level since July
2007, from 81.8 in July, a separate report showed.
"We expect growth to remain on a firmer trajectory as improving
economic fundamentals continue to reassert themselves," said
Gennadiy Goldberg, a U.S. economist at TD Securities in New York.
In a third report, the Institute for Supply Management-Chicago said
its barometer of Midwest factory activity shot up to 64.3 this month
from 52.6 in July. It was the biggest monthly point gain since July
1983 and indicated continued strength.
U.S. stocks, which hit record highs in recent sessions, traded
slightly higher, while the dollar firmed against a basket of
currencies. Prices for U.S. Treasury debt were little changed.
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SAVINGS RISE
Consumer spending has been sluggish as households have opted to save
extra money from steady income gains. Income rose for a seventh
straight month in July, while savings hit their highest level since
December 2012.
High savings, combined with declining debt burdens, should put
consumers in better position to spend.
"Consumers could be positioned to trim savings and tap credit to
fuel stronger spending, although it remains to be seen," said Jim
Baird, chief investment officer at Plante Moran Financial Advisors
in Kalamazoo, Michigan.
Weak consumer spending left inflation muted in July, giving the
Federal Reserve room to keep overnight interest rates near zero for
some time.
Consumer prices edged up 0.1 percent, the smallest rise since
February, the spending report showed. In the 12 months through July,
it was up just 1.6 percent.
Excluding food and energy, prices also rose 0.1 percent, with the
12-month reading holding at 1.5 percent.
The Fed targets inflation of 2 percent.
(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione
and Dan Burns in New York; Editing by Tim Ahmann and Paul Simao)
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