After taking a rest in June, U.S. consumers were full of energy last month, the Commerce Department said Monday, increasing their spending by 0.8 percent even as their personal incomes grew 0.1 percent in July, the slowest pace in two years.
Outlays accelerated in July after a 0.2 percent decline in June, which was originally reported as a 0.7 percent drop


With spending rising faster than incomes, the personal savings rate fell from 1.3 percent to 0.6 percent, the lowest since December 2002.


"Consumer spending rebounded on the strength of rebate-induced auto sales," said Stuart Hoffman, the chief economist at PNC Financial Services Group.
A measure of inflation linked to the spending index was flat in July. Income growth was held back by a decline in government payments - mainly a reduction in the federal matching rate for Medicaid reimbursements. Tax cuts had affected how much money people received from the U.S. health insurance program. Wages and salaries rose by 0.4 percent in July after being unchanged in June.

But economists said the shopping spree may be limited. With less cash available to consumers from mortgage refinancing and tax rebates, they said, more job growth will be needed to sustain spending. "You have to get the jobs and the wages to replace those cash supplies, and that is what we are a little tentative about," said Neal Soss, chief economist at Credit Suisse First Boston.


The report Monday showed that consumer spending on durable goods, like cars, rose by 4.1 percent, compared with a 3.2 percent drop in June. Spending on nondurables, like food, increased by 0.2 percent for the second straight month. Spending on services rose by 0.4 percent in July, up from a 0.3 percent gain.
Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus, consumers play a key role in shaping economic activity.
Adjusted for inflation, spending on durable goods like autos, furniture, and other long-lasting items rose 4.5 percent, after falling 3.1 percent. Spending on nondurable goods rose 0.6 percent after falling 0.2 percent. Spending on services, which account for almost 60 percent of all outlays, increased 0.2 percent after no change."I'm surprised personal income increases were so modest," said Tim O'Neill, chief economist at BMO Financial in Toronto.


"Obviously you can't continue to get that kind of spending growth if you don't see some income growth," he added. "The key is what's going to happen in the labor market."


President George W. Bush and his Democratic opponent, Senator John Kerry, have sparred frequently during the presidential campaign over the health of the economy and the availability of jobs.


The Federal Reserve - hopeful that economic activity would strengthen in coming months - increased short-term interest rates for a second time this year on Aug. 10 in an effort to make sure that inflation does not become a problem to the economy. The action left a key rate controlled by the U.S. central bank at 1.5 percent.
The economy grew at a 2.8 percent annual rate in the April-to-June quarter of this year as high energy prices weighed on economic activity.


That was more sluggish than first thought, marking a slowdown from the 4.5 percent growth rate in the previous quarter, and providing fresh evidence that the economy hit a rough patch in the early spring and late summer. In striking evidence that U.S. inflation is well under control, both the price index for consumer purchases and core prices, one of the Federal Reserve's favorite measures of inflation, were unchanged last month, the data Monday showed. "There is no inflation acceleration," said Robert Brusca, the chief economist at Fact and Opinion Economics.(AP, AFP, Bloomberg, Reuters)

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