U.S. Economy: Consumer Spending Increases in August (Update1)

By Joe Richter


Sept. 28 (Bloomberg) -- Consumer spending in the U.S. rose more than forecast in August, suggesting Americans are as yet undeterred by a softening labor market and higher borrowing costs.

The 0.6 percent rise in spending was the biggest in four months and followed a 0.4 percent increase in July, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation cooled, while the National Association of Purchasing Management-Chicago said business activity unexpectedly picked up.

Purchases of autos and furniture surprised most economists, signaling that the economy may be able to keep expanding this year even as confidence takes a hit from the jump in credit expenses during August. Smaller price increases give Fed policy makers room to cut interest rates again should a deepening housing slump threaten a broader slowdown.

``The overall data point to an economy that is weathering the credit crisis quite well,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the gain in spending. ``So far, the turbulence in the credit markets and the housing markets has not spread over to the broader economy.''

The National Association of Purchasing Management-Chicago's index of business activity rose to 54.2 in September, from 53.8 the previous month. The Reuters/University of Michigan measure of consumer confidence was 83.4 this month, remaining at the lowest level in a year. Construction spending unexpectedly rose in August, led by factories, hotels and offices, another Commerce Department report showed.

`Still Positive'

``The current Fed policy abets a flight path of lower but still positive growth, with moderate inflation,'' Atlanta Fed President Dennis Lockhart said in a speech today at Middle Tennessee State University in Murfreesboro, Tennessee. ``More turbulence may be ahead.''

Treasuries were little changed. The yield on the benchmark 10-year note rose 1 basis point to 4.58 percent at 3:08 p.m. in New York.

Incomes increased 0.3 percent in August after 0.5 percent, today's report also showed. Income was forecast to rise 0.4 percent, according to the Bloomberg News survey median.

Economists forecast spending, which makes up more than two- thirds of the economy, would rise 0.4 percent for a second month, according to the median of 76 estimates in the Bloomberg survey.

Easing Inflation

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, increased 0.1 percent in August for a sixth consecutive month. It was up 1.8 percent from August 2006, the smallest gain since February 2004.

Some Fed policy makers, including Ben S. Bernanke before becoming chairman, have said they'd prefer core inflation within a 1 percent to 2 percent range.

Adjusted for inflation, spending also rose 0.6 percent in August, the most since October, after a 0.3 percent gain the prior month, the report showed.

Because the increase in spending was larger than the gain in incomes, the savings rate fell to 0.7 percent, from 0.9 percent the prior month.

Disposable income, or the money left over after taxes, increased 0.4 percent after rising 0.6 percent.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, jumped 2.8 percent. Purchases of non-durable goods were little changed and spending on services, which includes utilities and accounts for almost 60 percent of all outlays, climbed 0.6 percent.

Wage Gains

A decline in confidence hasn't translated into a collapse in spending, which makes up more than two-thirds of the economy. So far, wage gains helped shield consumers from the effects of a worsening real-estate recession.

The economy's underlying resilience, along with future Fed actions, ``should they be desirable,'' will most likely keep the economy ``on a track of moderate average growth and gradually declining inflation over the next few years,'' Fed Bank of St. Louis President William Poole said in a speech in New York today.

Retail sales in August rose 0.3 percent after a 0.5 percent gain the prior month, according to a Commerce Department report Sept. 14. Receipts at automobile dealerships and parts stores rose the most since July 2006, the report showed.

Union, New Jersey-based Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, this week said second-quarter profit rose more than analysts estimated after it lowered prices to lure in customers.

Dim Outlook

Economists foresee lower sales by year-end. The economy lost jobs last month for the first time in four years and defaults among subprime borrowers have jumped, prompting banks to boost borrowing rates and make it more difficult to get loans. Home- price declines also mean fewer owners can tap into equity for extra cash.

A Sept. 25 report from the International Council of Shopping Centers and UBS Securities LLC showed retail sales at stores open at least a year fell 1 percent last week from the previous week, the second straight decline. Lowe's Cos. and Target Corp. this week cut their earnings forecasts.

Consumer spending will probably grow at a 2.25 percent average annual pace in the second half of 2007, compared with a 2.55 percent rate from January through June, based on the median in a Bloomberg survey of economists Aug. 30 to Sept. 7. Quarterly gains averaged 3.7 percent in the last decade.

The economy will grow 2 percent this year, the least since 2002, according to the Bloomberg survey.

Pound Drops for Fourth Week as Northern Rock Worsens Sentiment

By Gavin Finch and Anchalee Worrachate

Sept. 29 (Bloomberg) -- The pound dropped for a fourth week against the euro after the Financial Times reported that Northern Rock Plc had been forced to borrow a further 5 billion pounds ($10 billion) to stay in business.

The U.K. currency traded near the lowest in more than 2 1/2 years yesterday, posting its worst quarterly performance since March 2003, as an Organization for Economic Cooperation and Development report showed a real-estate slump may be crimping the wider economy. Interest-rate futures suggested there's a greater chance than a month ago that the Bank of England will cut interest rates from 5.75 percent.

The Northern Rock loan ``indicates there are still reasons to be cautious on the outlook for risk,'' said Kamal Sharma, a London-based currency strategist at Bank of America Corp. ``We're not out of the woods yet.''

The pound traded at 69.79 pence per euro by 4:10 p.m. in London yesterday, near the lowest since January 2005, and down from 69.75 pence at the end of previous week.

It fell almost 4 percent this quarter against the common European currency.

``There is now a risk that growth will be weaker going forward, which could imply a need for interest-rate reductions,'' the Paris-based OECD said this week in its economic outlook. ``The interest-rate increases over the last year, together with recent financial-market volatility, are expected to slow the housing market'' in the U.K.

The U.K. currency rose to $2.0379 yesterday, from $2.0203 a week before. It's advanced against the dollar for the past seven quarters.

Dollar Weakness

The dollar fell against 14 of the 16 most-traded currencies tracked by Bloomberg this quarter on speculation losses on subprime mortgages are having a worse effect on the U.S. than on many other countries.

The pound was also hurt against the euro after a report on behalf of the European Commission yesterday showed U.K. consumer confidence fell to a six-month low in September.

Gilts advanced yesterday as investors sought the relative safety of government debt. The yield on the two-year note fell 10 basis points to 5.04 percent. The price of the 4 percent security due March 2009 rose 0.14, or 1.4 pounds per 1,000-pound ($2,032) face amount, to 98.58.

The 10-year gilt yield dropped 5 basis points to 5.01 percent. U.K. bonds also advanced this quarter as U.S. subprime losses spread.

The implied rate on the December interest-rate futures contract fell 7 basis points yesterday and 14 basis points in the past month to 6.07 percent. That's its second monthly decline this quarter.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 16 basis points more than the benchmark rate, currently 5.75 percent, over the past decade.