By Joe Richter
Aug. 26 (Bloomberg) -- Consumer spending in the U.S. picked up in July while home sales fell, a sign income gains are sustaining demand even as the housing recession deepens, economists said before reports this week.
Personal spending increased 0.3 percent last month, three times the gain in June, according to the median forecast of economists surveyed by Bloomberg News before a Commerce Department report. Purchases of previously owned homes probably fell to an annual rate of 5.70 million, the fewest since October 2002, according to the survey.
The labor market has so far been strong enough to prevent a collapse in spending, softening the blow to the economy from a drop in home values and a widening credit crunch. Even with a resilient consumer, Federal Reserve policy makers said on Aug. 17 that ``downside risks to growth have increased appreciably,'' increasing speculation they will cut interest rates next month.
``The consumer is slowing but still healthy,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``There's now tightening in many credit markets and it's harder to borrow, so the Fed is worried about a broad-based slowing in the economy rather than a housing-centric slowdown.''
The spending report, due Aug. 31, may show incomes rose 0.3 percent after a 0.4 percent gain in June, according to the median estimate of economists surveyed by Bloomberg.
The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, probably rose 2 percent from July 2006, up from 1.9 percent in June, which was the smallest 12-month increase since 2004.
Fifth Decline
The forecast decline in sales of previously owned homes would be the fifth straight drop reported by the National Association of Realtors. The figures are expected tomorrow.
Higher borrowing costs and stricter lending standards are making it more difficult to qualify for loans, causing a rise in the number of unsold homes and pulling prices lower.
A report the following day may show declines in home prices in 20 U.S. metropolitan areas during June. The S&P/Case-Shiller index has fallen every month this year.
``We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,'' Robert Toll, chief executive officer of Toll Brothers Inc., said in a statement last week. Toll is the largest U.S. luxury homebuilder.
Subprime Fallout
Lenders and many borrowers are under increasing strain as the fallout from the collapse of the subprime mortgage market spreads. Mortgage applications fell 5.5 percent in the week ended Aug. 18, according to the Mortgage Bankers Association.
The crisis is compounding consumer concerns about falling home values and elevated energy costs. Sentiment among U.S. consumers dropped in August to the lowest level in a year, according to an Aug. 17 report from the University of Michigan.
A similar report from the New York-based Conference Board on Aug. 28 may show confidence among Americans this month was the lowest in a year.
The Fed cut the rate on direct loans to banks this month, trying to increase liquidity as investors avoid assets linked to subprime mortgages. Fed officials left the benchmark federal funds rate unchanged at 5.25 percent.
The Fed's view that downside risks had grown may have signaled a reversal from its Aug. 7 outlook that inflation was the greatest risk. Minutes of the Federal Open Market Committee's most recent meeting will be released on Aug. 28.
Bets on Fed Cut
Interest-rate futures on Aug. 24 showed traders reduced bets that the Fed will lower its overnight lending rate between banks by a half-percentage point to 4.75 percent by its Sept. 18 meeting. Futures showed a 60 percent chance of a cut to 5 percent, compared with 40 percent odds a week earlier. Forty percent were betting on a cut to a 4.75 percent funds rate by then, down from 60 percent the prior week.
A Bloomberg survey of economists, taken Aug. 1 to Aug. 8, forecast consumer spending to rise at a 2.3 percent pace in the third quarter after a 1.3 percent pace in the second quarter.
Some retailers lowered earnings estimates this month, raising concern that the consumer may have lost steam since that survey was taken, economists said.
Wal-Mart Stores Inc. and Home Depot Inc., the two largest U.S. retailers, on Aug. 14 said the housing slump, rising mortgage defaults and high energy prices will depress earnings for the year.
General Motors Corp., the biggest U.S. automaker, is trimming production at six North American plants that make large pickup trucks and sport-utility vehicles to clear dealer lots of excess inventory.
`Modest' Impact
Still, Fed Vice Chairman Donald Kohn said Aug. 19 that the effect of the subprime-mortgage crisis on U.S. consumer spending will likely be ``modest,'' though there's risk of a bigger slump.
Retailers Target Corp. and Saks Inc. said last week that sales will rise this year on the success of higher-margin designer goods.
On Aug. 30, the government will issue the second of three estimates of second-quarter growth. A narrower trade gap in June probably pushed up growth during the quarter to a 4.1 percent annual rate, compared with the 3.4 percent pace the government estimated on July 27.
Figures the following day from the National Association of Purchasing Management-Chicago will show business activity this month expanded at a pace similar to July, while a government report will show a second straight gain in factory orders, economists said.
