Economy Watch: Consumer Spending Up in August, Incomes Not So Much

There was a disconnect between a rise in consumer spending and a rise in personal income during August, according to the Bureau of Economic Analysis on Friday, and it didn't bode well for the U.S. economy.

There was a disconnect between a rise in consumer spending and a rise in personal income during August, according to the Bureau of Economic Analysis on Friday, and it didn’t bode well for the U.S. economy. Personal income increased $15 billion, or 0.1 percent during the month, and disposable personal income was also up 0.1 percent, but personal spending increased $57.2 billion, or 0.5 percent.

Most of the increase didn’t mean that consumers were buying more stuff, though car sales were up. Instead, they were paying more for gasoline, and a bit more for food. According to AAA, the average price of gas has been going down in recent weeks, but it was elevated toward the end of summer, especially in August. A month ago, the national average was $3.826 for a gallon of unleaded, while a year ago, it was $3.455.

To help pay for that difference between spending and income, Americans saved less as a whole. Personal saving—disposable personal income minus less personal outlays—was $444.8 billion in August, according to the BEA, compared with $492.2 billion in July. Personal saving as a percentage of disposable personal income was 3.7 percent in August, compared with 4.1 percent in July.

Student loans threaten to dent economy

The U.S. Department of Education reported on Friday that the percentage of borrowers who defaulted on federal education loans within the first three years they had to pay them back rose to an average of 13.4 percent in 2011. The number reflects a poor jobs outlook for recent graduates, but also staggering tuition inflation, and bodes ill for the broader economy, as more graduates are yoked with crippling student debt that discourages other kinds of spending.

During the last five years, the number of borrowers who have taken out student loans with federal guarantees has grown by about a third, to more than 37 million. The number of borrowers currently in default on this kind of loan is about 5.9 million, who collectively owe about $76 billion on the defaulted loans. All together, outstanding borrowing to pay for education costs recently topped $1 trillion, more even that U.S. credit card debt.

The three-year default rate for students attending for-profit schools was 22.7 percent. Public colleges, by contrast, a saw default rate for the same period of 11 percent, and students who attended private nonprofit schools experienced a rate of 7.5 percent.

Other indicators proved mixed

Fannie Mae reported on Friday that its single-family serious delinquency rate fell to 3.44 percent in August from 3.5 percent in July. This August’s rate is the lowest level since April 2009. During August of 2011, the rate was 4.03 percent.

Separately, the Chicago Purchasing Managers reported on Friday that September’s Chicago Business Barometer dropped to 49.7, its lowest level in three years. Among the barometer’s components (business activity measures), five of seven posted declines. New orders and backlogs, for example, contracted for the fourth time in the last five months.

Also on Friday, the final Reuters/University of Michigan consumer sentiment index for September came in at 78.3, down from its preliminary reading of 79.2, but still up from the August reading of 74.3. Though slightly better than during August, consumers are still feeling relatively glum because of unemployment and higher gas prices.

Wall Street gyrated considerably on Friday, ending somewhat down. The Dow Jones Industrial Average lost 48.84 points, or 0.36 percent, while the S&P 500 and the Nasdaq were down 0.45 percent and 0.65 percent, respectively.