By Shobhana Chandra
Aug. 29 (Bloomberg) -- Spending by U.S. consumers slowed in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power.
The 0.2 percent rise in purchases matched forecasts and followed a 0.6 percent increase in June, the Commerce Department said today in Washington. Prices rose by the most in 17 years.
Today's figures underscore economists' projections for U.S. economic growth to slow from the 3.3 percent annual pace in the second quarter that the government reported yesterday. Americans, faced with rising unemployment, soaring food and fuel costs and falling home values, are cutting back on big-ticket items like automobiles and furniture.
``We are looking for a clear slowdown in the economy,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, who accurately forecast the gain in spending. ``Inflation has been eating into spending power.''
Treasuries fell, with yields on benchmark 10-year notes at 3.82 percent at 9:48 a.m. in New York, compared with yesterday's close of 3.78 percent. The Standard & Poor's 500 Stock Index dropped 0.3 percent at 1,297.03.
A measure of business activity unexpectedly rose in August, separate figures showed today. The National Association of Purchasing Management-Chicago said its business index increased to 57.9 from 50.8. Fifty is the dividing line between expansion and contraction.
Economists' Forecasts
Economists had forecast spending would rise 0.2 percent, according to the median of 75 estimates in a Bloomberg News survey. Projections ranged from gains of 0.8 percent to a drop of 0.1 percent.
Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates. That was after a 0.1 percent gain the prior month, today's report showed. The median forecast was a decline of 0.2 percent.
The report's price gauge tied to spending patterns jumped 4.5 percent from July 2007, the biggest 12-month gain since 1991.
The Federal Reserve's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent for a second month. The so-called core price measure was up 2.4 percent from a year before, the most since February 2007.
Adjusted for inflation, spending plunged 0.4 percent, the biggest drop in four years. Price-adjusted purchases of durable goods, such as autos, furniture, and other long-lasting items, dropped 1.6 percent. Spending on non-durable goods decreased 0.9 percent, and services, which account for almost 60 percent of all outlays, were unchanged.
Holding Rates
Concern over both slower growth and rising prices led Fed policy makers to hold the benchmark interest rate at 2 percent this month.
Rising unemployment, falling stock and house prices and stricter lending rules ``were viewed as pointing towards weak growth in personal consumption expenditures during the second half of 2008,'' minutes of the Fed's Aug. 5 meeting released this week showed.
The drop in incomes pushed the savings rate down to 1.2 percent from 2.5 percent the prior month.
Disposable income, or the money left over after taxes, decreased 1.1 percent. Adjusted for inflation, it fell 1.7 percent after declining 2.6 percent in June.
Other reports indicate purchases of big-ticket items are weakening. Sales of autos and light trucks plunged in July to a 12.5 million annual pace, the lowest since 1993, according to Bloomberg calculations based on industry data.
Williams-Sonoma
The real-estate slump in also hurting purchases of household goods. Williams-Sonoma Inc., the biggest U.S. gourmet- cookware chain, said yesterday that second-quarter earnings dropped 29 percent and reduced its annual sales forecast.
Weakening trends continued through August and are worst in cities most affected by the housing slump, Chief Executive Officer Howard Lester said on a conference call. At Pottery Barn and West Elm, for example, purchases have suffered in Southern California, Nevada and south Florida, he said.
``It is extremely difficult to know how the consumer will respond in the back half of the year,'' Lester said in a statement. ``We are also looking forward to 2009 with a very cautious outlook.''
The longest expansion in consumer spending on record will probably end this year, according to economists surveyed by Bloomberg earlier this month. Retail sales fell in July for the first time in five months, led by a slump in auto purchases, according to Commerce data.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net
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