Falling Incomes Means Less Consumer Spending

The Commerce Department released data on Friday reporting incomes fell for the first time in nearly two years in August. The report also showed that consumers are digging into their savings to keep spending. The Commerce Department report said spending rose 0.2 percent, in line with economists’ expectations, after increasing 0.7 percent in July. When adjusted for inflation, spending was unchanged after rising 0.4 percent in July.

“What you’re basically getting is a scene where consumers are losing momentum, they’re losing momentum on income and as a result of that they’re slowing down on spending,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities in New York.

U.S. stocks opened lower after the data, while bond prices soared, pushing the 30-year yield down to 2.93 percent. New concerns are taking hold in financial markets as investors worry that with no quick fix to the euro-zone crisis, the global economic slowdown will worsen.

Manufacturers are retrenching. Industrial conglomerate Ingersoll Rand was the latest, cutting its third-quarter and full-year earnings forecast to below market estimates, citing weak demand at its key North American residential and commercial markets for security technology.

A gauge of consumer sentiment rose to 59.4 in September after tumbling to a nearly three-year low 55.7 in August, according to Friday reports on the gauge from Thomson Reuters/University of Michigan. A preliminary reading released earlier this month estimated a sentiment level of 57.8 for September. The sentiment reading, which gauges how consumers view their personal finances as well as business and buying conditions, averaged about 87 before the recession hit a couple of years ago.

Consumer spending growth slowed sharply to a 0.7 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year. Overall economic growth rose at a 1.3 percent rate in the second quarter after expanding only 0.4 percent in the January-March period.

written by Rachel Brook

Rachel Brook is an up and coming financial writer focusing on commodity price inflation and how the overall market reacts to the price swings. She also covers emerging markets in Africa and SE Asia.

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