Originally created 08/04/98

Americans keep spending despite weak growth in income



WASHINGTON -- Americans kept spending at a strong pace in June even though their incomes posted the smallest increase in 3´ years. The combination of weak income growth and strong spending pushed the personal savings rate down to an all-time low.

The Commerce Department reported today that personal incomes rose by just 0.2 percent in June, just half of the 0.4 percent May gain. The big decline reflected in part a loss of $2 billion, at an annual rate, in wages because of the General Motors strike, which was not settled until last week.

A closely watched barometer of the manufacturing sector, the National Association of Purchasing Management's composite index, retreated again in July, dropping to 49.1 percent, down from 49.6 percent in June.

It marked the second consecutive decline after 22 straight months above the 50 percent mark, the dividing line between a manufacturing sector that is expanding and one that is shrinking.

Analysts said the decline reflected continued problems U.S. companies are having selling exports because of the Asian economic crisis and highlighted the principal factor holding back the U.S. economy at present.

But a third report today showed that the domestic economy continues to have major momentum despite the Asian headwinds. Construction spending jumped 1.7 percent in June, the biggest advance in more than a year, as spending for residential construction rose to an all-time high.

Overall construction spending climbed to a seasonally adjusted $644 billion in June, the second highest level on record. The stronger-than-expected increase reflected a 1.6 percent rise in single-family homes and a 2.1 percent increase in non-residential buildings. Construction activity this year has been powered by falling interest rates.

"The economy is still quite healthy, but it is certainly slowing from the torrid pace that we saw last year and the first quarter of this year," said Cynthia Latta, economist at Standard & Poor's DRI.

Wall Street had little reaction to the blizzard of economic reports. At mid-morning, the Dow Jones industrial average was down 34.50 at 8,848.79.

The 0.2 percent rise in June incomes matched gains in April of 1997 and October 1996 and was the smallest since a 0.1 percent rise in November 1994.

Consumer spending, which accounts for two-thirds of economic activity, rose at a strong 0.6 percent clip in June. While this was slower than the 0.9 percent surge in May, that gain had been the strongest in nearly a year.

Even with the strong June increase in consumer spending, the overall economy slowed significantly in the April-June period. The government reported Friday that the gross domestic product -- the economy's total output of goods and services, rose at an annual rate of just 1.4 percent in the spring, a dramatic slowdown from a 5.5 percent growth rate in the first three months of the year.

The slower growth was blamed on the GM strike, the loss of export markets caused by the Asian financial crisis and an effort to work down a record increase in business inventories that had occurred in the first three months of the year.

Even with the ending of the GM strike, many economists believe the slower growth will continue for the rest of the year as the Asian crisis pushes America's trade deficit to record levels and depresses manufacturing activity and foreign sales by American farmers.

Americans' disposable personal income, the amount left over after paying taxes, was up 0.2 percent in June, the same increase as the overall income figure.

The continued strong growth in spending and the slowdown in incomes pushed the amount Americans were able to save down to 0.2 percent in June, the lowest level since the government began keeping monthly statistics in 1959. The savings rate had dipped to 0.5 percent in May after a 1.1 percent rate in April.

Americans save less than any other major industrial country and Washington policy-makers are currently trying to figure out ways to boost the low figures so that the 73-million members of the Baby Boom generation will have enough resources to retire without putting undue strains on the Social Security program.

Part of the low savings also reflects a statistical quirk in how the government reports the data. It reflects the amount left over after subtracting spending from incomes. However, the government does not count capital gains profits as part of income. Thus the savings rate appears lower in times when people are cashing in their stock market gains and spending the profits.