Consumer spending perked up last month, according to a government report, surging to its highest level in five months and giving U.S. stock markets a big boost on Monday.
After falling 0.1% in June, a decline that contributed to sentiment that the U.S. was slipping back into recession, the Commerce Department reported the figure jumped 0.8% in July, the most since February.
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That beat economists estimates of an increase of 0.5% and prompted optimism that rejuvenated spending levels could give the economy a much needed boost. Consumer spending makes up about 70% of the U.S. economy.
After adjusting for inflation, spending rose 0.5% in July -- the biggest gain since December 2009. A month ago spending fell by less than a percentage point.
Personal income rose by 0.3%, in line with economists predictions. Disposable personal income also rose by 0.3%.
The Commerce Department said spending on motor vehicles and car parts contributed significantly to the July increase in spending. Lack of spending on cars caused the decrease in June, according to the government report.
The Dow Jones Industrial Average was up over 180 points in early trading primarily on the consumer spending news but also on a bit of upbeat news out Europe related to that regions ongoing debt crisis.
Chris Christopher Jr., an economist with IHS Global Insight, suggested optimism tied to the spending data may be short-lived.
The good news is that gasoline prices are on their way down. However, the bad news is tremendous. Consumers face many headwinds such as falling home prices, weak 401(k)s, higher food prices, poor employment prospects, and economic uncertainty, he said.
Still, the report provided a good start to the third quarter and offered a glimmer of hope that the economy could avoid another recession. A slew of recent economic data has suggested otherwise.
Stagnant labor markets with unemployment hovering above 9%, downward revisions of first half GDP, and recent signs that regional manufacturing is slowing has many economists predicting a double-dip recession.
The gloomy sentiment combined with fears that European debt woes could shut off global credit markets and serve as a catalyst for a second financial crisis had sent stock markets swooning through much of August.
If consumer spending is picking up and gains momentum into the fall it would bode well for production, lending a boost to manufacturing and ultimately pushing GDP higher.
Mondays positive economic news strengthened many traders belief that stock markets are oversold and poised for a rebound.
The real test will come Friday when the government releases the August employment report. If the jobs report comes in stronger than expected, those figures tied with better-than-anticipated consumer spending numbers could signal that the economy is gaining momentum heading into the second half of 2011.
Any positive momentum would ease pressure on the Federal Reserve to step in with additional measures to boost the economy. Fed Chairman Ben Bernanke has repeatedly said the Fed is ready to move if necessary, but hes facing increasing resistance from his own board members, some of whom are skeptical of the effectiveness of past Fed measures.
Fed critics have said so-called easy money policies are contributing to a rise in inflation.
The Commerce Department report touched on inflation: The personal consumption expenditures price (PCE) index rose 0.4% after falling 0.1% in June. Compared to a year ago, the index is up 2.8%, the largest increase in nearly two years. It rose 2.6% in June.
The core PCE index, which excludes food and energy, rose 0.2% for the second straight month. The core index, which is closely watched by Federal Reserve officials, increased 1.6% in the 12 months through July.
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