Watch CBSN Live

Rise in worker pay should help lift U.S. economy

WASHINGTON - U.S. workers in July saw the biggest jump in their pay in seven months, a sign the economy is picking up speed.

Incomes rose 0.4 percent last month, with wages and salaries growing 0.5 percent, the U.S. Commerce Department said Friday. And that growth in compensation seems to be giving people the confidence to shop.

The report also indicates that consumer spending, which accounts for 70 percent of U.S. economic activity, got off to a good start in the third quarter. The Commerce Department says spending rose 0.3 percent in July, helped by a big jump in purchases of big-ticket items such as cars. June's result was revised up to a matching 0.3 percent gain.

Economists believe the economy will be fueled in the second half of this year by solid income and spending gains.

"Household income is steadily rising, and consumer spending is rising along with it as noted by solid gains in July for both personal income and consumer spending," said Stuart Hoffman, chief economist with PNC Financial Services Group. "Consumers are benefiting from job growth of better than 200,000 per month, modest wage growth, low gasoline prices that have boosted after-inflation incomes, solid balance sheets and low interest rates.

The July rise in pay and spending follows a government report on Thursday showing that the economy grew much faster between April and June than previously thought, reflecting a pick-up in consumer spending and business investment.

The economy expanded at an annual rate of 3.7 percent in second quarter, more than a percentage point greater than the 2.3 percent originally estimated, the Commerce Department said. That was the strongest growth since last summer and marked a sharp improvement from the anemic 0.6 percent advance during the January-March quarter when a harsh winter sapped activity.

"Consumer spending has been leading overall economic growth so far in 2015, and that will remain the case through the rest of this year and into next," Hoffman said.

Although consumer spending points to more vigorous growth in the second half of the year, inflation remains muted, a sign the economy has yet to hit its stride. The personal consumption expenditures price index, a key gauge of inflation, rose only 0.1 percent in July, ticking down from 0.2 percent the previous month.

That puts year-over-year inflation gain at 1.2 percent, the slowest pace since March of 2011, according to BMO Capital Markets Economics.

Analysts say weak inflation, coupled with this week's volatile trading on Wall Street and concerns about global economic growth, could persuade the Federal Reserve to delay a hike in interest rates.

Until recently, many forecasters expected the central bank to start lifting short-term rates at its September 17-18 policy meeting. But some analysts think the Fed, which last raised rates in 2006, is now likely to wait until next year to begin policy tightening to avoid stifling growth.