U.S. personal income tumbled unexpectedly in July and inflation-adjusted spending shrank at sharpest rate in four years as the lift from government stimulus checks waned, a government report on Friday showed.
A big jump in prices pushed inflation to a 17-year high, the Commerce Department said, eroding what little spending power consumers had. The report suggested the economy's stimulus-related momentum was fading after a surprisingly strong second quarter.
"With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers," said Ian Shepherdson, an economist with High Frequency Economics in Valhalla, New York.
U.S. stocks opened lower, while Treasury debt prices gained slightly after the report. Short-term interest rate futures trimmed chances for Federal Reserve interest rate increases next year.
Personal income fell 0.7 percent in July, the sharpest decline since a 2.3 percent plunge in August 2005 after Hurricane Katrina, the government said. Analysts were expecting income to hold steady.
Consumer spending, which accounts for about two-thirds of national economic activity, rose 0.2 percent, as expected, the slimmest gain since February. However, inflation-adjusted spending fell 0.4 percent, the biggest drop since June 2004 and the second consecutive monthly decline.
The government issued $13.7 billion rebate checks last month as part of a plan to deliver an extra $107 billion to American households this year to cushion the blow from a deep housing slump and tight credit. However, the amount of checks issued in July dropped by half from June's level.
Prices paid by consumers rose by a sharp 0.6 percent last month, pushing the year-on-year rise in the personal consumption expenditures price index up to 4.5 percent, the highest since February 1991.
Much of the increase was due to fast rising food and energy prices. But even with those costs stripped out, prices gained 0.3 percent from June and were up 2.4 percent over the past year, the biggest year-over-year gain since February 2007.
A separate report showed New York City's economy shark for a third straight month in August, providing one of the first glimpses on how the economy may have fared this month.
The National Association of Purchasing Management-New York said its index of current business conditions rose to 45.3 in August from 38.5 in July. But that was still below the 50 level that separates growth from contraction.
The report showed business managers facing stiffer costs as a prices paid index rose to an 11-month high.
While fast-rising food and energy prices have taken a big toll on U.S. consumers and businesses, a big drop in the price of oil since a record high reached last month could soon offer a wave of relief.
