Cash for Clunkers Gives Boost to Spending in July

Government incentives to boost the economy appear to be working, as consumers decided to cut the savings rate and spend more (mostly on cars) in July, even as incomes failed to move forward.

Personal incomes were unchanged in the month, with wages & salaries recovering just 0.1% following a 0.3% loss in June. Compared to last year, incomes are down 2.4%, while the minor gain in wages is the first positive number in close to a year.

Spending edged up 0.2%, a modest gain following the 0.8% advance in June, but consumption will have to advance another 1.6% to match last year’s levels. The upward movement wasn’t broad-based, but rather a reflection of the Cash for Clunkers program, which boosted durable goods spending on cars by 1.8%.

“You can see the tire marks made as consumers zipped out of the dealer lots with their newer, gas-efficient cars, leaving their old gas-guzzling clunkers behind,” said economist Jennifer Lee from BMO Capital Markets. Lee noted that when inflation is taken into account, the 0.2% rise in personal spending is the biggest since January. It’s also the third straight advance.

Spending on services climbed 0.3% in the month, but spending on non-durables dipped 0.3%.

“Consumer spending appears to be on track to rise by close to 2% in the third quarter and, given a slowdown in inventory liquidation, stabilization in capital spending, and a sharp reduction in the drag from housing construction, we think real GDP can increase by around 3% in the third quarter,” said analysts from RDQ.

Spending is only advancing as consumers save less, however, suggesting old habits die hard. After hitting a 12-year high of 6% in May, the savings rate, fell to 4.2% in July, the lowest rate since March. 

“Despite the drop in savings, we still expect U.S. consumers to continue to stock money away over the next year to help paydown debt, which would lift the savings rate back to 6% again,” commented Jennifer Lee.

As for inflation, the price index for personal consumption & expenditures fell 0.8% from July 2008, the lowest on record dating back to 1960. The core measure, which excludes volatile energy and food components, is up 1.4% from last year, six-tenths below the Federal Reserve’s preferred rate, and marking the slowest rate since 2003.

Moving forward, TD’s Ian Pollick said to expect “personal spending to move notably higher in August” as the other $2 billion for the Cash for Clunkers program is spent. He also said incomes “should continue to post soft monthly movements.”

Here is the data table…

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