Consumer spending should pick up again in coming months as the job market improves and incomes rise, after Americans uncharacteristically turned frugal in the second quarter, economists say.
High oil prices bore much of the blame for the unexpectedly modest 1.0 percent increase in consumer spending in the quarter ended in June, the weakest pace since the 2001 recession. It was around half of Wall Street's expectations.
"Income generation in the economy remains pretty strong right now and employment is starting to pick up, so we think consumer spending will bounce back," said Wachovia economist Jay Bryson.
While more recent data for July suggests consumption picked up in recent weeks, the one caveat is that the economy could face renewed headwinds from the latest surge in energy costs.
Oil futures touched a fresh record above $43 on Friday, but the spike has not yet translated into a renewed increase in gasoline prices, which could crimp spending.
Bryson sees moderate spending growth of 2.5 percent to 3.0 percent going forward, still below the robust 4.1 percent rate of the first three months of the year. He said he may rethink that estimate if gasoline prices start to reflect the latest oil spike. Consumer spending is critical because it accounts for around two-thirds of US economic activity. In addition, businesses need to be sure that demand will hold up before they invest in new equipment and capacity.
Figures on Friday showed overall economic growth, as measured by gross domestic product, rose a below-trend 3.0 percent in the April-June quarter, entirely due to the softness in household spending.
Indeed, final sales, which exclude inventories, have been on a steadily declining trend for the past year, falling from a 6.8 percent growth rate in last year's third quarter to 3.7 percent, 3.3 percent and 2.8 percent in the latest quarter.