Economic Stimulus Fading for Consumers

By Reuters -  |  Posted 2008-08-29 Email Print this article Print
 
 
 
 
 
 
 

The unexpectedly weak income and spending data combined with a jump in oil prices and disappointing earnings to drive stock prices down. In late morning, the blue chip Dow Jones industrial average was off more than 1 percent. Prices for U.S. government bonds, which react negatively to inflation, moved lower, while the dollar held steady versus the euro but slipped against the yen.

STIMULUS FADING

"With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers," said Ian Shepherdson, an economist with High Frequency Economics in Valhalla, New York.

The government issued $13.7 billion stimulus checks to U.S. households last month -- about half of the amount sent out in June. By the end of July, $90 billion had been delivered as part of the effort to put an extra $107 billion in consumers' hands this year.

Consumer prices rose by a sharp 0.6 percent last month, pushing the year-on-year rise in the personal consumption expenditures price index up to 4.5 percent, the highest since February 1991.

Much of the increase was due to fast rising food and energy prices. But even with those costs stripped out, prices gained 0.3 percent from June and were up 2.4 percent over the past year, the biggest annual gain since February 2007.

Other reports showed that business activity in the Midwest expanded in August at a stronger rate than expected as new orders jumped, while New York City's economy shrank for a third straight month.

The Institute for Supply Management-Chicago business barometer surged to 57.9 in August from 50.8 in July. Economists had forecast the index at 50.0, straddling the line between expansion and contraction.

Separately, the National Association of Purchasing Management-New York said its index of current business conditions rose to 45.3 in August from 38.5 in July.

The reports showed business managers continued to face stiff production costs.

While fast-rising food and energy prices have taken a big toll on U.S. consumers and businesses, a big drop in the price of oil since a record high reached last month could soon offer a wave of relief.

(Additional reporting by Burton Frierson and Pedro Nicolaci da Costa in New York and Ros Krasny in Chicago; Editing by James Dalgleish)



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