After some quiet elation over yesterday's vastly improved second-quarter GDP figures, today's report on July income and spending should cool your jets just a titch.

Spending by U.S. consumers slowed in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power. Purchases rose 0.2 percent, one-third the pace in June, the Commerce Department said today in Washington, while prices surged the most in 17 years. ...

The increase in spending matched the median forecast of 75 economists in a Bloomberg News survey.

Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent.

Final sales were revised up from 3.9% to 4.8% growth, so the remainder of that increase comes from an inventory reduction that was less than anticipated. An inventory rebuild will therefore not be as large as we thought (though July production looks like it was pretty strong.) The July figures seem to indicate a much smaller increase in consumption to start us out; the rebate checks appear to have run their course. It appears that credit allows many to have spent their rebates either in advance or at the moment they received their rebates; carry-on retail sales to the third quarter might not be as large as we thought.

Add to this, as spencer notes, that we are getting a good deal of growth in the second quarter from strong exports to a world economy that appears to be slowing, and you have the makings of what could be a very soft second half.

Labels: economics