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WRAPUP 1-U.S. consumer spending rises solidly; income rebounds

Fri, 28th Aug 2020 14:40

* Consumer spending increases 1.9% in July

* Personal income rebounds 0.4%

By Lucia Mutikani

WASHINGTON, Aug 28 (Reuters) - U.S. consumer spending
increased more than expected in July, strengthening expectations
for a sharp rebound in economic growth in the third quarter,
though momentum is likely to ebb as the COVID-19 pandemic
lingers and fiscal stimulus dries up.

The report from the Commerce Department on Friday also
showed a rise in personal income after two straight monthly
declines, while monthly inflation pushed higher. The Federal
Reserve on Thursday rolled out a sweeping rewrite of its
mandate, putting new weight on the U.S. labor market and less on
worries about too-high inflation.

Consumer spending, which accounts for more than two-thirds
of U.S. economic activity, rose 1.9% last month, after jumping
6.2% in June. Economists polled by Reuters had forecast consumer
spending gaining 1.5% in July.

Consumers boosted spending on goods like new motor vehicles.
Spending on goods has rebounded above pre-pandemic levels. They
also lifted spending on healthcare, dining out and on hotel and
motel accommodation. Still, outlays on services are below
February levels as consumers remain wary of exposure to the
virus.

That is a bad omen for the services-based economy, which
slipped into recession in February. Though new COVID-19
infections have subsided after a broad resurgence through the
summer, many hot spots remain, especially at college campuses
that have reopened for in-person learning.

The economy suffered its deepest contraction in at least 73
years in the second quarter, with consumer spending at the
forefront of the decline in gross domestic product.

While economists are anticipating a sharp rebound in GDP in
the third quarter, led by consumer spending, they are cutting
estimates for the fourth quarter.

RETAIL INVENTORIES REBOUND

Prospects for third-quarter GDP growth were boosted by
another report from the Commerce Department on Friday showing a
rebound in retail inventories in July. That could offset a
potential drag from rising imports, which led to a widening in
the goods trade deficit last month.

U.S. stocks were trading higher as the prospect of super low
interest rates for a prolonged period spurred risk appetite. The
dollar fell against a basket of currencies. U.S. Treasury prices
rose.

Americans in low-wage jobs have borne the brunt of the
economic downturn. A $600 weekly unemployment supplement from
the government expired on July 31. Though President Donald Trump
extended the supplement, the payout was cut to $300 per week and
funding for the program is expected to be depleted by September.

A few states are offering the extra unemployment benefit.
Economists estimate the loss of the $600 could cut $50 billion
from retail sales in August. At least 27 million people are on
unemployment benefits.

Last month, income rose 0.4% amid an increase in wages as
more businesses reopened, offsetting a decrease in government
transfer payments. Income fell 1.0% in June. Wages gained 1.3%
after increasing 2.2% in June.

With spending heavily tilted towards goods, monthly
inflation increased further in July. The personal consumption
expenditures (PCE) price index rose 0.3% after surging 0.5% in
June. In the 12 months through July the PCE price index
increased 1.0% after gaining 0.9% in June.

Prices excluding the volatile food and energy components
rose 0.3%, matching June's advance. In the 12 months through
July, the so-called core PCE price index climbed 1.3% after
increasing 1.1% in June. The core PCE index is the preferred
inflation measure for the Fed's 2% target, which is now a
flexible average.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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