July consumer spending up: Is US economy back on recovery track?

The rise in consumer spending counters investor fears of a dip back into recession as the American consumer loosens up a bit.

Mark Lennihan/AP
People pass an American Eagle Outfitters clothing store, in New York, in this July 30 photo. Consumer spending rose in July at a faster pace than in June, an important sign that the US economy may be clinging to a path of recovery.

Consumer spending rose in July at a faster pace than in June, an important sign that the US economy may be clinging to a path of recovery rather than recession.

The gain in consumer activity was modest: The Commerce Department reported that personal spending rose 0.4 percent in July, after three cooler months for consumers.

It's a dash of good news, helping to counter investor fears about a possible dip back into recession in the months ahead.

The consumer economy still isn't performing as strong as in past rebounds from recession, a trend that could weigh on job creation in the months ahead. But Monday's report is reassuring on two fronts: Consumer spending came in a bit better than economists had expected, and the rise comes after a worrisome slow patch.

"Last month's report indicated that consumers were pulling back; this report indicates that the American consumer is cautiously [loosening] up a bit and there exists pent-up demand for large ticket items such as automobiles," economist Chris Christopher of IHS Global Insight wrote in an analysis of the numbers.

The Commerce Department reported that July was a tepid month for personal incomes.

Although disposable income rose 0.2 percent, the number turns into a slight decline of 0.1 percent after adjusting for inflation. Personal spending, adjusted for inflation, rose 0.2 percent. Because spending growth outpaced incomes in July, the personal savings rate fell slightly. Still, the savings rate remained near 6 percent of disposable income.

The consumer news adds to a few other modestly upbeat current indicators.

On Friday, a Reuters/University of Michigan index of consumer sentiment ticked upward by 1.1 points for the month of August after a large decline the previous month. July saw an improvement in bank lending conditions and lending activity. And even in the still-troubled housing market, low interest rates fueled an increase in mortgage applications, reported last week.

Economists at Goldman Sachs, looking at the July spending numbers, estimate that consumer spending could rise at a 2 percent annual rate in the third quarter -- essentially the same slow and steady pace it has been on for about a year.

The problem is that many businesses can respond to slow gains in consumer spending by boosting productivity or having employees work longer hours. So a central question for economic policymakers remains how to spur job creation.

President Obama pointed to the challenge in a broadcast interview Sunday. "The economy is still growing, but it's not growing as fast as it needs to," he told NBC.

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.