U.S. economy: Saved by the consumer?

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Maybe Ben Bernanke knows what he's talking about after all.

Just a few days ago, the Fed boss was telling the world (via his much-anticipated speech at the annual economicpolicypalooza in Jackson Hole, Wyo.) that he wasn't convinced the U.S. economy was really in as dire straits as many people feared. Now we have some strong evidence to back up his assertion - and from the long-suffering U.S. consumer, no less.

The U.S. personal income and expenditure figures for July, released Monday morning, showed that personal consumer spending jumped 0.8 per cent in the month. That was well above the expected 0.5 per cent, and a sharp rebound from June's 0.1-per-cent decline.

Economists were particularly excited by the fact that the upswing was led not by consumable staples such as food and gasoline, but by discretionary durable goods - the big stuff, the kind of things consumers normally don't line up for unless they're starting to feel pretty good about their finances. (Or it's Christmas. Which, I'm reasonably sure, it's not.)

They also noted that in real terms - i.e., once you remove the impact of price increases - spending was up 0.5 per cent in July, the biggest monthly gain since December, 2009.

Even though it's only one data set for one month, the economists say these numbers have huge positive implications on U.S. gross domestic product for the third quarter, as consumer spending accounts for roughly 70 per cent of U.S. GDP.

"Annualized [GDP]growth may now come in around 2.5 per cent, if not a little big higher, compared with our previous expectation of around 1.5 per cent," said senior U.S. economist Paul Dales of Capital Economics - an independent market-research firm that's generally very conservative, if not downright pessimistic, in its forecasts.

"Even if real spending were to rise by a more modest 0.2 per cent [month over month]in both August and September, then annualized real consumption would accelerate to 2.5 per cent in the third quarter as a whole, from 0.4 per cent in the second," he wrote in a note to clients. "On its own, that would add 1.5 [percentage points]to GDP growth."

"Even if spending were to stay flat in August and September, personal consumption would still grow at an annualized rate of almost 2 per cent in Q3 based on July's numbers alone," wrote economist Chris Jones of Toronto-Dominion Bank.

However, there's a catch. Personal income rose 0.3 per cent in July - but in real terms, excluding inflation, that actually represented a decline of 0.1 per cent. The burst in spending, then, was financed not by income but by savings: The personal saving rate slipped to 5.0 per cent from 5.5 per cent.

"This trend cannot continue," Mr. Dales said.

Stefane Marion, chief economist and strategist at National Bank Financial, also noted that the August consumer confidence numbers were down sharply - which could imply that personal spending this month may take a step backward.

"Having said this, even under the assumption that discretionary spending remains flat in the next two months, Q3 would still show annualized growth of 1.6 per cent, up markedly from 0.8 per cent in Q2," he said in a research note.