July might not have been such an awful month for the U.S. economy after all. Consumer spending -- one of the most important indicators -- flourished last month. When adjusting for inflation, it rose by 0.46%. That might not sound like a lot, but it's the biggest one-month increase since December 2009. Is the American consumer back?
Here's the chart, based on data released Monday morning by the Bureau of Economic Analysis:
As you can see, not only was spending growth quite high in July, but it follows three straight months of Americans cutting their spending. Those three months marked the first time spending had fallen since January 2010, so even a small increase in spending for August would have been a welcome change. That Americans spent so much more makes the news even better.
Spending is very important to the U.S. economy for a few reasons. First, consumers are responsible for a large portion of U.S. GDP. If their spending slows, so does economic growth. Second, unemployment remains high mostly because firms aren't sensing enough demand on the part of consumers for additional goods and services. As they continue to spend more, firms will begin to hire more aggressively. Seeing such a healthy spending increase in July provides a nice dose of optimism for the U.S. recovery.
But let's not jump to any conclusions based on one month's improvement. The same report from the BEA provides some not-so-good news as well. Real disposable personal income -- what consumers actually have to spend after taxes -- declined in July by 0.1%. That's the first decline since September 2010. Consumers need to make more money in order to spend more, or they'll merely run up their credit balances. Spending growth supported by additional debt isn't sustainable, so we need to see both spending and income rise simultaneously for the recovery to proceed confidently forward.
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