Consumer spending rose again in June, marking the second straight month the economy has seen a rise. This surprised many on Wall Street because despite the increase in spending, personal incomes dropped more than expected.
Consumer spending is an aspect of the financial picture that is watched very closely because it accounts for around 70 percent of total economic activity. An increase in consumer spending for the second straight month could potentially provide a lift to the economy but this may be hard to sustain if incomes continue to fall.
The Commerce Department recently said that consumers boosted their spending 0.4 percent in June, which was slightly ahead of analysts’ estimates and this came after a 0.1 percent increase in May.
What concerns the financial world is that personal income fell 1.3 percent in June after rising by the same amount in May. During the previous month, incomes were boosted by the one-time payments from the Obama administration’s stimulus package. Economists project personal incomes to fall by 1 percent in June so this drop was more than expected which presents dangerous potential because personal incomes are the fuel for future spending.
Amid the longest recession since World War II, the personal savings rate has surged as Americans seek to rebuild their nest eggs after home values and stock portfolios plummeted last year. While saving can be good in the long run, rapid increases in saving can slow the economy.
The department said the personal savings rate fell to 4.6 percent in June, after jumping to 6.2 percent in May, which was the highest since February 1995. The rate dropped as low as 1 percent at times last year.
Prior to the minor surge of consumer spending in the months of May and June, sluggish consumer spending has held back the sales of food and beverage companies. For example, Tyson Foods Inc. (NYSE: TSN), the world’s largest meat producer, announced that sales fell 3 percent in its third quarter. Despite the drop in sales, the company posted a strong profit due to cutting costs. Turning to the beverage, we see that the powerful company MillerCoors, the U.S. joint venture owned by Molson Coors Brewing Co. and SABMiller, (NYSE:TAP), increased by only 1 percent in the most recent quarter.
With the increase in consumer spending, there is room for optimism but with the decrease in personal incomes, there is also the need for caution. While things have been dreadful on Wall Street, at least we can view this news as a sign of hope which is something we need at this juncture.
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