WASHINGTON – US personal income tumbled unexpectedly in July and inflation-adjusted spending shrank at sharpest rate in four years as the lift from government stimulus checks waned, a government report on Friday showed.
A big jump in prices pushed inflation to a 17-year high, the Commerce Department said, eroding what little spending power consumers had. The report suggested the economy’s stimulus-related momentum was fading after a surprisingly strong second quarter.
“With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers,” said Ian Shepherdson, an economist with High Frequency Economics in Valhalla, New York.
US stocks opened lower, while Treasury debt prices gained slightly after the report. Short-term interest rate futures trimmed chances for Federal Reserve interest rate increases next year.
Personal income fell 0.7 percent in July, the sharpest decline since a 2.3 percent plunge in August 2005 after Hurricane Katrina, the government said. Analysts were expecting income to hold steady. Consumer spending, which accounts for about two-thirds of national economic activity, rose 0.2 percent, as expected, the slimmest gain since February. However, inflation-adjusted spending fell 0.4 percent, the biggest drop since June 2004 and the second consecutive monthly decline.
The government issued $13.7 billion rebate checks last month as part of a plan to deliver an extra $107 billion to American households this year to cushion the blow from a deep housing slump and tight credit. However, the amount of checks issued in July dropped by half from June’s level. - Reuter