Page last updated at 14:32 GMT, Friday, 29 August 2008 15:32 UK

Slowdown in US consumer spending

Even low prices can't persuade shoppers to part with their cash

US spending rose by just 0.2% in July, official figures have shown, as the effects of a government package designed to boost growth wore off.

A separate survey, also released on Friday, said US consumer sentiment was at a 5-month high but warned of tough times ahead.

Personal income fell 0.7% in July, the sharpest fall since August 2005.

Friday's data provides further evidence of the weakness of the US economy after earlier reports of strong US growth.

The US economy grew at a revised 3.3% annual rate in the second quarter of 2008, the Commerce Department said on Thursday, much higher than its first estimate of 1.9%.

The rebound was linked to strong US exports, helped by the weak dollar, while government tax rebates also boosted consumer spending.

Tough times ahead

However, analysts said the consumer spending data indicated that the US economy was not out of the woods yet.

"There is not much that the market did not know here, but it is a reminder that the third quarter and particularly the fourth quarter will look a good deal worse than the second," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Jobseekers at a jobs fair in California
Consumers, fearful of losing their jobs, are spending less

The Reuters/University of Michigan Surveys of Consumers said its index for August rose to 63, its highest level since March. However, the index remains low overall and, for the third month in a row, the majority of consumers reported their financial situation had worsened.

"Overall, the data still indicate that the pace of growth in consumer spending will fall back towards zero in the fourth quarter of 2008 and the first quarter of 2009," the survey said.

Lynn Reaser, chief economist at Bank of America's Investment Strategies Group, said: "Consumers are certainly worried about the jobs and housing markets but lower gasoline prices have given them some tangible relief and we are seeing that relief expressed in the various consumer confidence figures."

Rising prices

If the impact of rising prices is factored in, spending actually fell by 0.4% in July, the weakest showing for inflation-adjusted spending in more than four years, the official figures showed.

Inflation, as measured by the rise in personal consumptions index, rose 4.5%, the sharpest rise since February 1991, the government said.

The mix of rising prices and faltering growth presents policymakers with a dilemma, making them reluctant to raise rates to combat inflation, in case the economy slows further.

Democrats want President Bush to deliver a second stimulus package, to boost spending and prevent a recession.

Analysts say the impact of the rebates is substantial. "The effects of the tax rebates rolling on and off are relatively large," said Steven Wieting, senior economist at Citigroup.

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