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"Spending Rises, Boosted By Cash-for-Clunkers; Incomes Flat"

Bottom Line

Ø Consumer spending rose 0.2% in July. There was no inflation, so the real dollar increase was also 0.2%.

Ø About three-quarters of the spending increase was for new vehicles, spurred by cash-for-clunkers incentives.

Ø Personal income was unchanged, although wage and salary income edged up by 0.1%, its first increase this year.

Ø The saving rate fell back to 4.2% from 4.5% in June.

Ø The core PCE price index rose 0.1%, and its year-on-year rate edged down to 1.4%, its lowest since October 2003.

Outlook

The cash-for-clunkers incentives boosted consumer spending in July and will give an even bigger kick in August. But, aside from that, consumer spending is still subdued. Incomes remain weak, showing no change in July, although there was one encouraging signal in that wage and salary income edged higher, its first monthly increase so far this year. But the labor market is still shedding jobs.

When given sufficient incentive (as in cash-for-clunkers) consumers will spend. But reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers. Consumers remain a missing link in hopes for strong recovery.

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