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Rise in Spending Outpaces Income Gain; Savings Dip

August 25, 1987|Associated Press

WASHINGTON — Consumer spending, bolstered by brisk auto sales and exceptional air-conditioning costs, soared 0.9% in July for the second month in a row, more than twice as fast as incomes grew, the government reported Monday.

The Commerce Department said personal income also was up, but more modestly: 0.4% in July, compared to 0.3% gains in May and June. It was the biggest income gain since a 0.6% advance in April.

With the growth of spending far outpacing the growth in incomes, Americans dipped deeper into their savings to make up the difference.

Personal savings, the ratio of savings to after-tax income, fell to 2.8% in July from 3.3% in June and from the 4.3% rate for all 1986.

"The consumer has adapted very well to not saving any money," said David Wyss, chief financial economist for Data Resources Inc. in Lexington, Mass. "One may wonder how long this can continue, but it appears low savings rates will be with us for a while."

Despite the low savings, Monday's report was greeted by economists as a strong sign for the economy and an indication that the nearly 5-year-old economic expansion is continuing.

Consumer spending makes up roughly two-thirds of the gross national product.

"We've got a rebound in consumer spending going, but a small one," said Sandra Shaber, an economist with the Futures Group, a Washington consulting business. "But we should be cautious. This rebound is self-limiting. We have the low savings rate, high debt burdens and small wage gains. For many people, incomes are not even keeping up with inflation."

White House spokesman Marlin Fitzwater, in Santa Barbara during President Reagan's vacation, commented: "Recent strong gains in personal consumption bode well for GNP growth in the third quarter."

Inflation for the first seven months of 1987 has been running at an annual rate of 5%, based on the consumer price index.

Analysts said the heat wave in many parts of the nation contributed to the brisk spending figures as electricity bills surged.

Automobile sales also remained high, as dealers offered incentives to clear their lots before the introduction of 1988 models.

However, the increase in spending was across a wide range of products and not limited to auto and higher electricity charges.

The two months of 0.9% consumer spending increases followed a 0.2% gain in May. The twin gains were the highest since a 2.3% surge in February.

Wages and salaries, the key component in the incomes category, increased at an annual rate of $5.4 billion in July, down slightly from a $5.9-billion June advance.

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