(MENAFN- Arab Times) WASHINGTON Aug 29 (Agencies): US consumer spending fell in July for the first time in six months but a rise in confidence among households in August to a seven-year high suggested the retrenchment was likely temporary. Other data on Friday showed a sharp acceleration in factory activity in the Midwest underscoring the economy's relatively strong fundamentals. 'Strong labor market gains and consumer confidence at cycle highs should continue to support spending in the coming months helping GDP growth average 3 percent or higher in the latter half of the year' said Gennadiy Goldberg a US economist at TD Securities in New York. Consumer spending dipped 0.1 percent last month after rising 0.4 percent in June the Commerce Department said. Economists had expected consumer spending which accounts for more than two-thirds of US economic activity to increase 0.2 percent. When adjusted for inflation it slipped 0.2 percent after gaining 0.2 percent in June. Spending was weighed down by declines in automobile purchases while a mild July reduced demand for utilities. Households also cut back on other items. The weakness in consumer spending at the start of the third quarter poses a downward risk to growth estimates for the period. Most economists however still expect another quarter of sturdy growth citing strong consumer confidence as well as solid growth in employment manufacturing and business spending. Other sectors such as housing and government spending are also on the mend. Separately the Thomson Reuters/University of Michigan's consumer sentiment index increased to 82.5 in August the highest since July 2007 from 81.8 in July. 'It's consistent with continued moderate growth in consumer spending' said Dean Maki chief US economist at Barclays in New York. Consumer spending rose at a 2.5 percent annual pace in the second quarter helping to lift the economy to a 4.2 percent growth rate. Spending is lagging income gains but economists expect it to catch up. Income last month rose 0.2 percent after increasing 0.5 percent in June. With households cutting back on spending savings hit their highest level since December 2012. Rising savings also bode well for future spending. Weak consumer spending left inflation pressures muted in July giving the Federal Reserve room to keep its benchmark overnight lending rate near zero for some time while it awaits an acceleration in wage growth. A price index for consumer spending edged up 0.1 percent after increasing 0.2 percent in June. That was the smallest rise since February. In the 12 months through July the personal consumption expenditures (PCE) price index rose 1.6 percent. It also increased by 1.6 percent in June. Excluding food and energy prices inched up 0.1 percent after rising by the same margin in June. The so-called core PCE which is the Fed's favorite inflation measure increased 1.5 percent in the 12 months through July continuing to run below the US central bank's 2 percent target. It had advanced 1.5 percent in June. In a third report the Institute for Supply Management-Chicago said its business barometer shot up to 64.3 this month from 52.6 in July. It was the index's biggest monthly point gain since July 1983 and pointed to continued strength in the manufacturing sector. Inflation remained well below the Federal Reserve's longer-run 2.0 percent target. The personal consumption expenditures price index the Fed's preferred inflation measure rose 1.6 percent in July from a year ago while the core PCE index stripping out food and energy increased 1.5 percent. The disappointing data came a day after the Commerce Department revised up growth in the second quarter to a robust 4.2 percent annual rate from its July estimate of 4.0 percent. 'Even if real spending rises by 0.3 percent in both August and September the Q3 annualized gain will be just 1.1 percent' said Ian Shepherdson of Pantheon Macroeconomics. 'Expect forecast downgrades after these data.' The government reported Thursday that the overall economy grew at an annual rate of 4.2 percent in the April-June quarter even faster than the previous estimate. It was a solid rebound after the economy went into reverse in the January-March quarter shrinking at an annual rate of 2.1 percent. That setback came in the wake of unusually cold weather that kept shoppers away from the malls reduced factory production and disrupted other economic activities. Analysts are hopeful that the momentum that emerged during the second quarter will keep pushing the economy forward in coming months. Many expect growth in the current quarter to come in around 3 percent and they believe the economy will expand by around 3 percent in the fourth quarter as well. Much of that optimism stems from strong job growth this year. Jobs gains have averaged 244000 a month since February the best six-month string in eight years. Those gains have pushed the unemployment rate down to 6.2 percent. An improving job market means rising household incomes greater consumer confidence and thus more consumer spending. Financial markets are looking for signs that the Federal Reserve will begin raising interest rates out of concerns over inflation. However Fed Chair Janet Yellen in remarks last week at an annual conference at Jackson Hole Wyoming gave no hint that she is ready to support an increase in the Fed's benchmark short-term interest rate which has been near zero since December 2008. Many economists believe the first rate hike will not occur until next summer. Still some believe that if the job market keeps surpassing expectations the central bank may see the need to raise rates sooner possibly as early as next March.
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