US consumer spending expected to slow in July, reflecting cooler weather and lower auto sales

MarketsAssociated Press

The Commerce Department reports how much U.S. consumers spent and earned in July. The report will be released Friday at 8:30 a.m. Eastern time.

SPENDING SLOWS: The expectation is that consumer spending slowed to a gain of just 0.2 percent in July, according to a survey of economists by the data firm FactSet. Income is expected to have risen 0.3 percent in July after a 0.4 percent June increase.

Continue Reading Below

JUNE INCREASE: In June, consumers increased spending by 0.4 percent, the fastest pace in three months.

While income growth has lagged during the recovery, there have been recent signs of strengthening, helped by robust hiring games over the past six months.

The expectation for a slowdown in spending reflects a recent report showing that retail sales were essentially flat in July with spending declining at department stores and auto dealerships. Analysts also believe that spending on utilities was also held back by cooler-than-normal weather during the month.

Consumer spending is closely watched because it accounts for about 70 percent of economic activity.

The government reported Thursday that the overall economy grew at an annual rate of 4.2 percent in the April-June quarter, even faster than the previous estimate. It was a solid rebound after the economy went into reverse in the January-March quarter, shrinking at an annual rate of 2.1 percent in the January-March period. That setback came in the wake of unusually cold weather which kept consumers away from the shopping malls, reduced factory production and disrupted economic activities.

Analysts are hopeful that the momentum that emerged during the second quarter will keep pushing the economy forward in coming months. Many expect growth in the current quarter to come in around 3 percent and they believe the economy will expand by around 3 percent in the fourth quarter as well.

Much of that optimism stems from strong job growth this year. Jobs gains have averaged 244,000 a month since February, the best six-month string in eight years. Those gains have pushed the unemployment rate down to 6.2 percent.

An improving job market means rising household incomes, greater consumer confidence and thus, more consumer spending.

Financial markets are looking for signs that the Federal Reserve will begin raising interest rates out of concerns over inflation. However, Fed Chair Janet Yellen in remarks last week at an annual conference at Jackson Hole, Wyoming, gave no hint that she is ready to support an increase in the Fed's benchmark short-term interest rate, which has been near zero since December 2008.

Many economists believe the first rate hike will not occur until next summer. Still, some believe that if the job market keeps surpassing expectations, the central bank may see the need to raise rates sooner, possibly as early as next March.