US consumer spending gains, but home sales dip
Personal spending in July was up three times the gain in June; Strong labour market softens blow to the economy caused by credit crunch
By Agencies |
WASHINGTON: Consumer spending in the US picked up in July while home sales fell, a sign income gains are sustaining demand even as the housing recession deepens, economists said before reports this week.
Personal spending increased 0.3% last month, three times the gain in June, according to the median forecast of economists surveyed before a commerce department report. Purchases of previously-owned homes probably fell to an annual rate of 5.70 million, the fewest since October 2002, according to the survey.
The labour market has so far been strong enough to prevent a collapse in spending, softening the blow to the economy from a drop in home values and a widening credit crunch. Even with a resilient consumer, Federal Reserve policy makers said on August 17 that “downside risks to growth have increased appreciably,” increasing speculation they will cut interest rates next month.
“The consumer is slowing but still healthy,” said Ethan Harris, chief US economist at Lehman Brothers Holdings in New York. “There’s now tightening in many credit markets and it’s harder to borrow, so the Fed is worried about a broad-based slowing in the economy rather than a housing-centric slowdown.”
The spending report, due August 31, may show incomes rose 0.3% after a 0.4% gain in June, according to the median estimate of economists surveyed.
The report’s price gauge tied to spending patterns and excluding food and energy costs, the Fed’s preferred measure, probably rose 2% from July 2006, up from 1.9% in June, which was the smallest 12-month increase since 2004.
The forecast decline in sales of previously owned homes would be the fifth straight drop reported by the National Association of Realtors. The figures are expected tomorrow.
Higher borrowing costs and stricter lending standards are making it more difficult to qualify for loans, causing a rise in the number of unsold homes and pulling prices lower.
A report the following day may show declines in home prices in 20 US metropolitan areas during June. The S&P/Case-Shiller index has fallen every month this year.
“We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,” Robert Toll, chief executive officer of Toll Brothers, said in a statement last week. Toll is the largest US luxury homebuilder.
Lenders and many borrowers are under increasing strain as the fallout from the collapse of the subprime mortgage market spreads. Mortgage applications fell 5.5% in the week ended August 18, according to the Mortgage Bankers Association.
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Personal spending increased 0.3% last month, three times the gain in June, according to the median forecast of economists surveyed before a commerce department report. Purchases of previously-owned homes probably fell to an annual rate of 5.70 million, the fewest since October 2002, according to the survey.
The labour market has so far been strong enough to prevent a collapse in spending, softening the blow to the economy from a drop in home values and a widening credit crunch. Even with a resilient consumer, Federal Reserve policy makers said on August 17 that “downside risks to growth have increased appreciably,” increasing speculation they will cut interest rates next month.
“The consumer is slowing but still healthy,” said Ethan Harris, chief US economist at Lehman Brothers Holdings in New York. “There’s now tightening in many credit markets and it’s harder to borrow, so the Fed is worried about a broad-based slowing in the economy rather than a housing-centric slowdown.”
The spending report, due August 31, may show incomes rose 0.3% after a 0.4% gain in June, according to the median estimate of economists surveyed.
The report’s price gauge tied to spending patterns and excluding food and energy costs, the Fed’s preferred measure, probably rose 2% from July 2006, up from 1.9% in June, which was the smallest 12-month increase since 2004.
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The forecast decline in sales of previously owned homes would be the fifth straight drop reported by the National Association of Realtors. The figures are expected tomorrow.
Higher borrowing costs and stricter lending standards are making it more difficult to qualify for loans, causing a rise in the number of unsold homes and pulling prices lower.
A report the following day may show declines in home prices in 20 US metropolitan areas during June. The S&P/Case-Shiller index has fallen every month this year.
“We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,” Robert Toll, chief executive officer of Toll Brothers, said in a statement last week. Toll is the largest US luxury homebuilder.
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Lenders and many borrowers are under increasing strain as the fallout from the collapse of the subprime mortgage market spreads. Mortgage applications fell 5.5% in the week ended August 18, according to the Mortgage Bankers Association.
Also read:
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Investor confidence at 1-year lowThe crisis is compounding consumer concerns about falling home values and elevated energy costs. Sentiment among US consumers dropped in August to the lowest level in a year, according to an August 17 report from the University of Michigan.
A similar report from the New York-based Conference Board on August 28 may show confidence among Americans this month was the lowest in a year. The Fed cut the rate on direct loans to banks this month, trying to increase liquidity as investors avoid assets linked to subprime mortgages. Fed officials left the benchmark federal funds rate unchanged at 5.25%.
The Fed’s view that downside risks had grown may have signaled a reversal from its August 7 outlook that inflation was the greatest risk.
Minutes of the Federal Open Market Committee’s most recent meeting will be released on August 28.
Interest-rate futures on August 24 showed traders reduced bets that the Fed will lower its overnight lending rate between banks by a half-percentage point to 4.75% by its September 18 meeting.
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Futures showed a 60% chance of a cut to 5%, compared with 40% odds a week earlier. Forty per cent were betting on a cut to a 4.75% funds rate by then, down from 60% the prior week. A survey of economists, taken August 1 to August 8, forecast consumer spending to rise at a 2.3% pace in the third quarter after a 1.3% pace in the second quarter.
Some retailers lowered earnings estimates this month, raising concern that the consumer may have lost steam since that survey was taken, economists said.
Wal-Mart Stores and Home Depot, the two largest US retailers, on August 14 said the housing slump, rising mortgage defaults and high energy prices will depress earnings for the year.
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General Motors, the biggest US automaker, is trimming production at six North American plants that make large pickup trucks and sport-utility vehicles to clear dealer lots of excess inventory. Still, Fed vice chairman Donald Kohn said August 19 that the effect of the subprime-mortgage crisis on US consumer spending will likely be ‘modest,’ though there’s risk of a bigger slump.
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Retailers Target and Saks said last week that sales will rise this year on the success of higher-margin designer goods. On August 30, the government will issue the second of three estimates of second-quarter growth. A narrower trade gap in June probably pushed up growth during the quarter to a 4.1% annual rate, compared with the 3.4% pace the government estimated on July 27.
Figures the following day from the National Association of Purchasing Management-Chicago will show business activity this month expanded at a pace similar to July, while a government report will show a second straight gain in factory orders, economists said.
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