Aug. 4 (Bloomberg) -- U.S. personal incomes tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, signaling that consumer spending will take time to recover.
The decline partly reflected the unwinding of one-time transfer payments from the Obama administration’s stimulus plan, which boosted incomes 1.3 percent in May, figures from the Commerce Department showed today in Washington. Spending rose 0.4 percent in June as prices climbed. Adjusted for inflation, purchases fell 0.1 percent, the report showed.
The worst economic slump in seven decades eased last quarter as government spending programs started to take hold, underscoring forecasts the recession will end by the end of the year. The recovery is likely to be muted as job losses and falling home values cause Americans to boost savings and limit spending, which accounts for about 70 percent of the economy.
“We’ll see a weak economic recovery by past standards,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “For a sustained pickup in consumer spending, we need a clear-cut improvement in the labor market.”
Also today, the National Association of Realtors said the number of contracts to buy previously owned homes in the U.S. rose in June for a fifth straight month and beat economists’ forecasts, as lower prices attracted buyers. The 3.6 percent gain in the index of signed purchase agreements, or pending home resales, followed a 0.8 percent gain the prior month that was larger than previously estimated.
Stocks, Treasuries
Stocks and Treasuries were little changed after the reports. The Standard & Poor’s 500 Stock Index dropped 0.2 percent to 1,001.04 at 10:16 a.m. in New York. Yields on benchmark 10-year notes rose to 3.66 percent from 3.64 percent late yesterday.
Economists forecast personal income would fall 1 percent after a previously reported 1.4 percent gain in May, according to the median of 75 estimates in a Bloomberg News survey. Projections ranged from an increase of 1 percent to a drop of 1.6 percent. June’s decrease was the biggest since January 2005, the month after Microsoft Corp. sent out a special dividend.
Spending was projected to rise 0.3 percent for a second month, according to the Bloomberg survey.
Price Increases
Excluding the effects of the stimulus plan, incomes would have dropped 0.1 percent in June after no change the prior month, according to Commerce. Wages and salaries decreased 0.4 percent in June, the ninth drop in 10 months.
Today’s report showed price increases in June were smaller than in the same period last year. The inflation gauge tied to spending patterns dropped 0.4 percent from June 2008, the biggest decrease since records began in 1960.
The Federal Reserve’s preferred gauge of prices, which excludes food and fuel, increased 1.5 percent from a year earlier, the smallest gain since December 2003.
The drop in incomes caused the savings rate to fall to 4.6 percent from a 14-year high of 6.2 percent in May.
Adjusted for inflation, spending dropped 0.1 percent following little change in May.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, dropped 0.2 percent in June after rising 1.2 percent in the prior month.
Car Sales
Car sales may get a boost this quarter from the government’s “cash-for-clunkers” program, which offers as much as $4,500 for trading in older, less fuel-efficient vehicles. Ford Motor Co.’s sales rose in July for the first month since 2007. Purchases for the industry jumped to an 11.3 million annual pace last month, the highest level since September.
Price-adjusted purchases of non-durable goods decreased 0.4 percent after falling 0.1 percent, today’s report showed.
Spending on services, which account for almost 60 percent of all outlays, was little changed.
Consumer spending fell last quarter at a 1.2 percent pace, and the gain in the first quarter was revised to 0.6 percent, smaller than previously estimated, Commerce figures showed last week. Spending has fallen 2 percent since its peak at the end of 2007, the deepest retrenchment by consumers since 1980.
The job market continues to cloud the outlook for spending. The unemployment rate is projected to surpass 10 percent by early 2010, according to a Bloomberg survey. A report from the Labor Department in three days is forecast to show payrolls fell by 325,000 in July following a drop of 467,000 the prior month.
Consumers are reluctant to spend on much beyond necessities. MGM Mirage, the biggest casino owner on the Las Vegas Strip, reported a second-quarter loss as gambling revenue dropped. Las Vegas-based MGM slashed hotel room rates to attract tourists after companies canceled conferences.
“The operating environment remains challenging,” Chairman and Chief Executive Officer Jim Murren said on a conference call yesterday. Even so, “we see extremely positive signs, especially as we go into 2010.”
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