Income, Spending Flat in June as Pending Home Sales, Factory Orders Fell

Economic data reflect Bernanke's 'notable restraints on the recovery'

Bullish economic news was not to be found on Tuesday, August 3, as personal income and spending was reported to have held flat in June while wages paid fell. Pending home sales in the same month declined, and factory orders fell for the second month in a row.

According to the Commerce Department's personal income and spending report for June, personal income increased $3.0 billion, or less than 0.1%, and personal consumption expenditures decreased $2.9 billion, or less than 0.1%. In May, income increased 0.3% and spending increased 0.1%. On a positive note for June, personal saving rose to 6.4% of disposable personal income, or $725.9 billion, versus 6.3%, or $713.9 billion, in May.

The unchanged figures for June fell below consensus forecasts of 0.2% for income and 0.1% for spending, according to Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd., in Valhalla, New York.

"In the private sector manufacturing wages fell 0.9%, the biggest drop since June 2009; the numbers are volatile, though, and the trend is upwards," Shepherdson wrote in an analyst note. "In the government sector, the small dip in wages likely reflects the loss of temp Census jobs; we expect a further decline in July. Real spending in June rose 0.1%, as we expected; May and April revised down to be consistent with Q2 GDP data. If Q3 spending rises 0.1% per month too, the quarter as a whole will be up only 1.3% annualized. Finally note the 6.4% saving rate for June; highest since June '09. More saving equals faster deleveraging."

Pending home sales in June edged down, meanwhile, with near-term sales expected to be notably lower in contrast to the spring surge when buyers rushed to take advantage of the home buyer tax credit, according to the National Association of Realtors. The NAR's pending home sales index dropped 2.6% to a reading of 75.7 based on contracts signed in June from 77.7 in May, which is 18.6% below June 2009 when it was 93.0.

Lower home sales are likely to continue in the short term, said NAR Chief Economist Lawrence Yun in the June news release.

"There could be a couple of additional months of slow home-sales activity before picking up later in the year, provided the job market continues to improve," Yun said. "Over the short term, inventory will look high relative to home sales. However, since home prices have come down to fundamentally justifiable levels, there isn't likely to be any meaningful change to national home values. Some local markets continue to show strengthening prices."

In a third discouraging economic release, the Commerce Department reported that new orders for manufactured goods in June were down two consecutive months, decreasing $5.1 billion, or 1.2%, to $406.4 billion. This followed a 1.8% May decrease and fell short of analysts' expectations for a 0.5% drop. Excluding the volatile transportation component, new orders decreased 1.1%.

Tuesday's economic data arrived the day after Federal Reserve Chairman Ben Bernanke spoke before the Southern Legislative Conference in Charleston, South Carolina, to address the "moderate pace" of the current recovery and states' fiscal challenges.

Pointing to "notable restraints on the recovery," Bernanke specifically mentioned the weak housing and stunted labor markets.

"Financial conditions--though much improved since the depth of the financial crisis--have become somewhat less supportive of economic growth in recent months," Bernanke said, highlighting foreign debt crises as a major source of turmoil for global markets.

Steve Blitz, senior economist with New York-based Majestic Research, said in a note that this first week of August gives an initial glimpse into what the third quarter of 2010 might look like.

"We can begin to see whether the sharp slide in the economy's momentum from first quarter to second continues into the summer. There is, to be certain, a downward bias for the third quarter given that the strong second-quarter performance for a number of sectors will not be repeated this quarter--home construction chief among them," Blitz wrote. "After all the second quarter revisions are in by late September, our expectation is that second-quarter growth will end up closer to our original forecast and that growth in the current quarter will also end up around 2%."

Read a story about personal income and consumer spending in May from the archives of InvestmentAdvisor.com.

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