Personal spenders lift US hopes

US personal spending has posted a healthy gain, boosting hopes the crucial household sector will be able to support the shaky economic recovery.

Combination of factors gave US wallets healthy boost
Combination of factors gave US wallets healthy boost

The Commerce Department said in a report on Monday that spending grew 0.8% in August after a revised 0.9% increase in July. Personal income, propelled by a large tax cut enacted by Congress in the spring, gained 0.2% last month.

In another sign that consumer spending gathered momentum in the third quarter, retailing giant Wal-Mart said it expected September sales to grow.

In a recorded update, the Bentonville, Arkansas-based discount retailer said sales at US stores opened at least one year were at a high end of its forecast for a 3% to 5% gain.

“I think the financial position of consumers is generally strong,” said Michael Moran, chief economist with Daiwa Securities America in New York.

The income and spending figures were close to Wall Street analysts’ expectations for gains of 0.3% and 0.8% respectively and caused little reaction in financial markets.

The NASDAQ composite stock gauge was up 13.99 points in morning trading, while the Dow Jones composite was up 24.42 points.

Cash injection

A combination of lower tax withholding rates and the advance tax credit cheques sent in July and August to families with children gave disposable personal income, minus taxes and other bills, a shot in the arm.

Disposable income grew 0.9% after a 1.5% jump in July. The July gain was the biggest monthly increase since January 2002, according to Commerce.

Daiwa’s Michael Moran said he expected economic growth at 5.2% annual rate in the July-September quarter.

But consumers did not pour all of the extra money into spending as the personal saving rate-savings as a percentage of disposable income-grew for a second straight month to 3.8%, its highest level since February.

In late July and early August, the government mailed out 22.8 million tax credit cheques worth a total of $13.7 billion.

The other major part of the tax package, a drop in the tax withholding rates for pay checks, went into effect in July.

In its report on Monday, the government said the tax withholdings were cut at an annual rate of $45.8 billion in August and July.

Economists monitor consumer spending, which makes up about two-thirds of overall economic activity. With extra cash in their wallets, consumers should spend robustly in the second half of the year, according to economists.

Source : Reuters

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