U.S. consumer spending pauses, but rising confidence offers hope

Fri Aug 29, 2014 12:51pm EDT
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending fell in July for the first time in six months, but confidence among households hit a seven-year high in August, suggesting the retrenchment would be temporary.

Another report on Friday showed a sharp acceleration in factory activity in the Midwest this month, a further sign the economy remains on solid ground.

"The weakness in spending will quickly subside this fall as consumer confidence is supported by record highs in the stock market, rising housing prices and improving labor market conditions," said Michael Woolfolk, global markets strategist at BNY Mellon in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity dipped 0.1 percent last month after rising 0.4 percent in June, the Commerce Department said. Economists had expected a 0.2 percent gain.

When adjusted for inflation, it fell 0.2 percent.

Spending was weighed down in part by a decline in automobile purchases and a weather-related drop in demand for utilities.

The weakness in spending prompted some economists to lower their forecasts for third-quarter economic growth. Goldman Sachs cut is projection by two-tenths of a percentage point to a 3.1 percent annual rate. Forecasting firm Macroeconomic Advisers cut its forecast by a similar amount, taking it down to 2.9 percent.

The economy grew at a 4.2 percent annual rate in the second quarter, with consumer spending advancing at a 2.5 percent rate.   Continued...

Women shop in a store run by clothing retailer Forever 21 in New York August 19, 2013.  REUTERS/Lucas Jackson