Consumer Spending Still So-So

WASHINGTON DC (AP) – Savings as a percentage of after-tax incomes stood - Consumer spending was sluggish in June as Americans had to divert more cash to filling up their gas tanks and a key inflation gauge rose at the fastest clip in more than a decade.

That raised concerns in financial markets that the Federal Reserve will push interest rates up for an 18th consecutive time .

The Commerce Department reported that consumer spending, after adjusting for inflation, posted a weak 0.2 percent rise in June, marking the 4th straight month of 0.2 percent or less.

An inflation gauge tied to consumer spending posted a 0.2 percent increase in June and a rise of 2.4 percent for the 12 months that ended in June, matching the rise in the 12 months that ended in September 2002 and the fastest increase since a 2.5 percent rise in the 12 months that ended in April 1995.

In other economic news, a report on construction spending showed unexpected strength in July, rising by 0.3 percent, to a record level, helped by big increases in spending on government, office and hotel projects.

And the Institute for Supply Management’s gauge of manufacturing activity in July posted a stronger than expected increase to 54.7, above the June reading of 53.8. However, part of that acceleration reflected a rise in raw materials prices as the costs of everything from fuel to paper increased.

The worrisome increases in inflation raised concerns on Wall Street that the Federal Reserve will feel the need to boost interest rates when policy-makers meet next Tuesday.

 “The Fed has to tighten next week, pure and simple,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “Core inflation is too high, and accelerating.”

Not all economists agreed with that assessment, however. They noted the weak rise in consumer spending, which accounts for two-thirds of total economic growth.

The weakness in consumer demand was a major factor in the government’s report last Friday that overall economic growth slowed to an annual rate of just 2.5 percent in the April-June quarter, far below the economy’s 5.6 percent January-March growth rate.

 “All the latest economic indicators continue to show the economy on a gentle glide path toward a soft landing,” said Bernard Baumohl, an economist with the Economic Outlook Group, a forecasting firm in Princeton Junction, N.J.

The Fed is hoping to slow the economy enough to keep inflation under control. However, the new spending report showed the opposing forces facing the central bank. Although consumer spending and the overall economy are slowing, inflation is getting worse.