U.S. consumers kept up their strong spending in July, taking advantage of renewed financing incentives to buy cars, even as income growth stalled.
The Commerce Department said personal spending surged 1.0 percent in July, its biggest gain since October last year.
The gain was propelled by a 3.7 percent advance in spending on durable goods. That was also the biggest monthly gain since October, when automakers first put in place no-interest finance deals to jump-start sales in the aftermath of the Sept. 11 attacks on New York and Washington.
While the increase in consumer spending provided a dose of good news for the struggling economic recovery, another figure in Friday's report seemed less encouraging.
Americans' incomes, which includes wages, interest and government benefits, was flat in July, reflecting the stagnant job market. Wages and salaries actually dipped by 0.2 percent.
Without steady income gains, it will be difficult for consumers to maintain July's pace of spending in the months to come. Economists watch consumer spending closely as it makes up two-thirds of economic activity.
Wall Street analysts had projected income to rise by 0.2 percent, and spending to be up 0.7 percent.
The shape of the recovery ultimately will be determined by consumers and the willingness or reluctance of businesses to spend and invest in the months ahead.
So far, eroding consumer confidence, the roller-coaster stock market and a stagnant job market haven't caused consumers to dramatically scale back spending. That's because those potentially negative factors have been offset by positive ones, including rising home values, low interest rates and a refinancing boom that has left people with extra cash.
Retail sales were solid in July, helped out by free-financing for cars, and home sales for the month were strong.
While more recent back-to-school sales have been sluggish, that should be offset by what economists expect will be robust auto sales for August.
Friday's report showed that consumers ratcheted up spending on big-ticket "durable" goods, including cars and appliances, by 3.7 percent in July, following a 1.6 percent increase in June.
Spending on durables, such as food and clothes, and services each rose by 0.6 percent in July. That compared with a 0.7 percent advance in durables in June and a 0.2 percent increase in spending on services.
Disposable, or after-tax, incomes rose by 0.2 percent in July, following a 0.7 percent increase.
With spending outpacing income growth in July, the nation's personal savings rate - savings as a percentage of after-tax income - dipped to 3.4 percent in July, the smallest since December. In June, the savings rate stood at 4.2 percent.
After bolting out of the gate with a brisk 5 percent growth rate in the first quarter, the economy stumbled in the spring, growing at an annual rate of just 1.1 percent.
Analysts believe the economy picked up a bit in the current quarter, with some estimates ranging from growth rates of around 2 percent to 3 percent. They said economic growth would have to be stronger for businesses to vigorously add to their payrolls and trigger a hiring wave.
For the second half of this year, some economists are predicting sluggish to moderate economic growth.
Hoping to give a boost to the recovery, the Federal Reserve has held short-term interest rates steady all year long.
Businesses, concerned about accounting scandals and economic uncertainties, have been wary of making big commitments to hiring and capital investment, factors restraining the recovery.
The economy's struggles pose a challenge for President Bush and will be a key topic for voters heading into the November elections.
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