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Rising confidence offers hope while consumer spending pauses in August 2014

According to recent reports, US consumer spending plummeted in July for the first time in the last six months, but most surprisingly, confidence among households hit a 7-year high in the month of August, 2014, suggesting the recession would be rather temporary. Another report showed a sharp acceleration in other factory activity in the Midwest, which is yet another sign that the economy still remains on solid ground. The weakness in consumer spending will very soon subside this fall as consumer confidence is being driven by record highs in the stock and share market, rising home prices and enhancing labor market conditions, as said by Michael Woolfolk a global market strategist.

Consumer spending, usually accounts for more than two-thirds of US economic activity, dipped 0.1% in July, after rising by 0.4% in June, as per the Commerce Department. Economists and financial experts had expected a 0.2% gain and when this was adjusted for inflation, it fell by 0.2%. Consumer expense was weighed down in part by a decline in automobile purchases and another drop in demand for utilities.

Consequences of weakness in consumer spending

Due to the sudden drop in consumer spending, some economists were prompted to lower their forecasts for the third quarter economic growth. Goldman Sachs cut down its projection by two-tenths of a percentage point to a 3.1% annual rate. Another forecasting firm Macroeconomic Advisers curb down its forecast by a similar amount, taking the percentage down to about 2.9%. The US economy grew at 4.3% annual rate in the second quarter of 2014, with consumer spending advancing at a rate of 2.5%.

Despite the transition of expectations, economists still expect yet another relatively sturdy quarter, keeping in mind the rise in confidence, a strengthening employment market conditions and gains in manufacturing and business expenses. Government and housing expenses are also about to mend themselves. Another separate report showed that the Thomson Reuters/ University of Michigan’s consumer sentiment index increased to 82.5 in August, which is the highest level since July, 2007. In short analysts expect a firmer growth as improving economic fundamentals continue to assert them.

A rise in savings rate – Another feather on the cap

Consumer spending has weakened as more and more households have opted to save some extra money from steady income gains. Income rose for a seventh month in July while savings rate hit their highest level since December, 2012. Actually high savings, combined with alleviating debt burden should prompt consumers to spend more. Consumers could even be positioned to trim down savings and tap credit in order to add fuel to the fire of stronger spending. But this remains to be seen.

The improving labor market conditions

Nonetheless, an improving labor market remains the cornerstone for future gains in consumer confidence and spending. According to recent reports, employers added around 217,000 workers to payrolls in the month of May, therefore lifting the average monthly advance so far this year to 213,600, the maximum for this year’s average. Another report today showed that the labor market continues to make steady growth and will continue to do so in 2015 too. The number of claims for jobless benefits plunged by 2000 last week to 312,000, as per figures from the Labor Department. More and more debtors are being able to repay their debt and many are even not requiring help from the debt consolidation companies. All this is a result of more cash flow, more financial awareness and increased savings.

With better household balance sheets and job growth, consumer fundamentals are still pretty strong. In a nutshell, the economy will be as steadier as it is now.

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