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Rising prices beat down consumer spending in June |
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Written by Martin Crutsinger, THE ASSOCIATED PRESS
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Monday, 04 August 2008 |
Shoppers leave the Berlin Mall in Berlin, Vt., Thursday, July 31, 2008. The Commerce Department reported Monday that consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February. THE ASSOCIATED PRESS/Toby Talbot
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WASHINGTON - Consumer spending, after adjusting for inflation, fell in June as Americans were hit with the second biggest increase in prices in nearly three decades.
The Commerce Department reported Monday that consumer spending dipped by 0.2 per cent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February.
The higher prices reflected a big surge in gasoline costs and helped to drive an inflation gauge tied to consumer spending up by 0.8 per cent in June, a monthly increase that has been exceeded only once since 1981. This price gauge jumped by one per cent in September 2005 after Hurricane Katrina shut down oil production along the Gulf Coast.
The big rise in inflation ate up a part of the billions of dollars in stimulus payments delivered during the month. Personal incomes rose by a tiny 0.1 per cent in June following a giant 1.8 per cent increase in May.
On Wall Street, stocks fell Monday in an erratic session as investors chose to worry about the inflation surge in the consumer spending report rather than the good news that oil prices fell by $3.69 to settle at US$121.41 a barrel in New York trading, the lowest level in three months.
The Dow Jones industrial average dropped 42.17 points, or 0.37 per cent, to close at 11,284.15. Broader stock indicators showed steeper declines.
In other economic news, the Commerce Department reported that orders to U.S. factories shot up at the fastest pace in six months in June, reflecting big increases in petroleum prices and heavy demand for military equipment.
The 1.7 per cent rise in June, the best showing since a 1.9 per cent increase in December, was more than double the gain that economists had expected. It was led by a 5.2 per cent surge in orders for primary metals such as steel. Orders for defence capital goods soared by 16.9 per cent, the second consecutive double-digit gain, reflecting heavy demand for military hardware to fight the wars in Iraq and Afghanistan.
Income gains were skewed by how the department accounts for the billions of dollars in stimulus payments that have been made over the past three months. Those payments totalled $1.9 billion in April, when the program was just getting started, then $48.1 billion in May and $27.9 billion in June.
Those payouts made incomes and after-tax incomes soar in May compared to April but weaken in June since the level of June payments was lower than they had been in May.
Consumer spending before removing inflation rose by 0.6 per cent in June after a big 0.8 per cent increase in May. Much of that spending went to pay higher prices for gasoline and other items, however. Removing inflation, spending edged up by a more modest 0.3 per cent in May and fell by 0.2 per cent in June.
The overall economy, as measured by the gross domestic product, grew at a 1.9 per cent rate in the April-June quarter, more than double the 0.9 per cent increase in the January-March quarter.
Economists believe the $168 billion stimulus program will continue to lift the economy in the current quarter. They predict there will be a significant slowdown in the final three months of this year and early next year, though.
Some analysts believe GDP will shrink in those two quarters, giving the country back-to-back GDP declines, the traditional definition of a recession.
The spending and incomes report showed that prices shot up by 0.8 per cent. Excluding food and energy, the increase was 0.3 per cent, up from a 0.2 per cent rise in May and the biggest one-month gain since a similar 0.3 per cent rise last September.
After-tax incomes fell by 1.9 per cent in June following a huge 5.7 per cent surge in May, both months heavily influenced by how the government accounted for the stimulus payments. Excluding those payments, after-tax incomes would have rise by 0.3 per cent in June after a 0.4 per cent rise in May.
The savings rate, as a per cent of after-tax incomes, dropped to 2.5 per cent in June after having shot up to 4.9 per cent in May.
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Last Updated ( Monday, 04 August 2008 )
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