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Consumer Buying Sees First Drop in 2 Years

Economy: July's 0.2% dip due in part to slower auto sales from GM strikes. But stock market jitters could lead to further declines, experts say.

August 29, 1998|From Bloomberg News

WASHINGTON — U.S. consumer spending dropped in July for the first time in more than two years as strikes at General Motors Corp. took a toll on auto sales, and analysts said falling stock prices could cause spending to weaken further in the months ahead.

Spending fell 0.2% in July after increasing 0.6% in June, the Commerce Department said Friday. The spending decline came even though Americans' incomes rose 0.5% in July, topping June's 0.3% rise--a sign jobs remain plentiful.

Also Friday, figures from the University of Michigan showed consumer sentiment weakened in August, falling to 104.4 from 105.5 in July. Since consumer spending accounts for roughly two-thirds of the nation's output of goods and services, any sign that consumers aren't in a buying mood could be a signal that economic growth will slow.

"The strength of the stock market gave us some pretty spectacular spending numbers in the first half of the year," said Christopher Low, an economist at First Tennessee Capital Markets in New York. "Now we're seeing confidence dented and spending weakened. The blow to the stock market is going to have the opposite effect in the third quarter."

July's drop in spending, the first since a 0.6% decline in June 1996, reflected a decline in auto sales, the government said. GM, the world's No. 1 auto maker, reported a 38% drop in sales last month because of two strikes that started in early June and shut down 26 assembly plants. By July dealers were reporting shortages of some popular models.

Still, in a sign consumer spending in the U.S. isn't dead yet, consumption of nondurable goods rose 3.7% in July.

The report from the University of Michigan is in line with the finding of the Conference Board's consumer confidence index released earlier this week. It fell to 133.1 in August from 137.2 in July. That report also showed a deterioration in consumers' outlook for the next six months as they digest news about the turmoil in Russia, crisis in Asia, anti-American terrorists, and the Monica S. Lewinsky scandal--and the effect of all the unsettling news on their investment portfolios.

And yet, the domestic economy remains intact, with low unemployment, low inflation and low interest rates. "Last month's pullback in spending is nothing more than consumers taking a breather," said William Cheney, chief economist at John Hancock Mutual Life Insurance Co. in Boston. "I see no reason for spending to slacken, especially as we are heading into the prime buying seasons--back to school and the holidays.

"The stock market of course is the wild card," he added.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Personal Income

Seasonally adjusted annual rate, in trillions of dollars:

July: $7.14 trillion

Source: Commerce Department

Personal Spending

Seasonally adjusted annual rate, in trillions of dollars:

July: $5.80 trillion

Source: Commerce Department

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