Flat incomes raise doubts about economic recovery

WASHINGTON (AP) — Household income in the U.S. is essentially stagnant, raising doubts about whether consumers already hurt by job losses can sustain an economic recovery.

The now-ended “Cash for Clunkers” program helped lift consumer spending last month and is expected to provide an even bigger boost in August. But any rebound could falter if shoppers don’t boost their buying, which makes up about 70 percent of U.S. economic activity.

“Consumers just don’t have the financial firepower to go out and spend more,” said Mark Zandi, chief economist at Moody’s Economy.com. “Unless businesses curtail their job cuts, the recovery could very well peter out.”

Stronger consumer spending is the key to a sustained recovery. For spending to rise, analysts said, income growth has to resume.

The Commerce Department reported Friday that personal incomes were flat in July, the eighth month out of 10 in which incomes have either fallen or failed to grow. Americans have been hammered by massive layoffs and efforts by some companies to restrain costs by forcing workers to take unpaid days off.

With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2 percent from 4.5 percent in June. The savings rate was 2.6 percent a year ago.

Economists expect the savings rate to rise in coming months to around 6 percent as workers try to rebuild depleted nest eggs. The process of rebuilding savings is one of the factors expected to depress consumer spending and weaken the broader recovery.

The 0.2 percent rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending also rose 0.2 percent in July, and 0.1 percent in June.

The slight rise in spending reflected a 1.3 percent jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of nondurable goods such as clothing actually fell 0.3 percent last month.

The unchanged reading for personal incomes followed large swings in the previous two months that reflected payments to individuals from the government’s $787 billion economic stimulus program. Those payments pushed incomes up 1.4 percent in May, and their absence in June caused incomes to fall 1.1 percent.

Even households with sufficient income to hit the shopping malls have trimmed their purchases and boosted savings to cope with a severe financial crisis that sent the stock market into a nosedive last year.