Personal Income, Spending Rise at Brisk Pace : July Gains of 0.7% Further Dispel Fears of Looming Recession

WASHINGTON â€”  Americans saw their personal incomes rise a brisk 0.7% in July and spent all of the extra income, the government said Wednesday in a report providing more good news about the country’s economic prospects.

The Commerce Department said the increase in personal income, fueled by rapid growth in wages and salaries, was the biggest monthly gain since a 1% increase in March.

The department said consumer spending also posted a 0.7% increase last month, the fastest advance since a 1.2% rise in April.

Automobile sales led the July spending increase, but gains in other areas signaled a continuation of solid growth, further dispelling fears that the economy was sliding into recession.

The surge in automobile sales was attributed to incentive programs aimed at reducing a high inventory of unsold cars.

The government also made significant revisions to previous months showing that income growth and consumer spending were not as sluggish as previously believed.

Private economists said the strong July increases and the upward revisions in earlier months showed that the current economic expansion, which this month became the second longest in U.S. history, was picking up steam.

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Just a month ago, there were widespread fears that just the reverse was occurring, with many analysts predicting, on the basis of weak reports, that the country was in danger of toppling into a recession.

“The economy was not nearly as weak in the spring,� said Bruce Steinberg, senior economist at the New York brokerage firm of Merrill Lynch. “The image of an economy on the verge of a recession has been changed by these revisions.�

On Tuesday, the government significantly revised upward its estimate of total economic growth, putting the increase in the gross national product from April through June at a healthy 2.7% annual rate instead of the anemic 1.7% rate reported a month ago.

Most of the upward revision in GNP growth came from a doubling of the estimate of how much consumers spent during the April-June quarter.

With car sales remaining strong in August, analysts looked for total consumer spending this quarter to surpass the second-quarter pace. Since consumer spending accounts for two-thirds of total economic activity, that would be good news for the economy.

Steinberg cautioned, however, that the steep discounting to reduce car inventories and buyer concerns about announced price hikes on the 1990 models would very likely translate into lackluster car sales in the final three months of the year and depress consumer spending during that quarter.

But Sandra Shaber, an economist with the Futures Group, a Washington consulting firm, said she expected other areas, such as sales of clothing and consumer electronics and more travel spending, to take up the slack from an expected drop in car sales.

Faster Spending Pace

“We have had some startling revisions in the economic data that have chased away the recession fears and put a whole different look on the strength of the marketplace,� she said. “Consumer spending was twice as strong as we earlier thought, and that strength seems to be continuing.�

“The report suggests a good pace of spending after the sluggish first half,� Allen Sinai, chief economist for Boston Co., said.

However, the stronger-than-expected economy will make it harder for the Federal Reserve Board to repeat the credit-easing moves it took earlier this summer without risking a return of inflation, analysts said.

“I don’t think the people at the Fed will undo what they did, but they are certainly not going to ease up any more for a while,� Sinai said.

The Bush Administration predicts that the economy will grow this year by a healthy 2.9%, a rate that private economists now agree is well within reach.

The current recovery from the 1981-82 recession, which is already the longest peacetime expansion in U.S. history, entered its 81st month in August, surpassing the 80-month-long recovery from June, 1938 to February, 1945, which occurred during World War II. The recovery period actually began in July, 1938.

The only longer expansion in U.S. history is the 106-month-long recovery from February, 1961, to December, 1969, which occurred during the Vietnam War.