Consumer mood brightens, inflation tame

WASHINGTON (Reuters) - Personal spending rose at its slowest rate in nine months in June while inflation moderated, but consumers' mood brightened considerably in early July, data showed on Tuesday.

Personal spending rose a slight 0.1 percent in June after posting 0.6 percent gains in each of April and May, despite a rise in income, according to a Commerce Department report that suggested falling home prices and high gasoline costs were pinching consumers.

That was well below Wall Street economists' forecasts and was the weakest since last September, when spending declined.

But the report also contained positive news about inflation risks. It showed a closely watched inflation indicator rising over the past 12 months at its slowest rate in three years.

Wells Fargo Bank said the welter of data did nothing to change its view that the U.S. economy will grow in a moderate 2.5 percent to 2.7 percent range over the next few quarters.

"These reports should build the Fed's confidence in their forecast of moderate growth and ebbing inflation, though they hardly alter the Fed's expected policy path on interest rates," Wells Fargo Senior Economist Scott Anderson said.

The inflation-wary Federal Reserve has held benchmark interest rates steady for more than a year in hopes persistent inflation would ease.

The core personal consumption expenditures price index, which excludes food and energy, rose 0.1 percent on the month and 1.9 percent on the year, the smallest year-on-year increase since March 2004. The overall PCE price index rose 0.1 percent on the month and 2.3 percent on the year.

Incomes grew in June by 0.4 percent, matching May's increase, with its wages and salaries component advancing a solid 0.5 percent.

CONSUMERS STILL BUOYANT

Financial markets took the economic data positively, with stock prices ahead at midday and U.S. Treasury debt prices mixed to modestly lower.

The prospects for continuing income gains in a solid job market appeared to buoy consumer spirits as July got under way, despite concerns about problems in the so-called subprime mortgage lending sector that policy-makers insist is so far not showing signs of adversely affecting the broader economy.

A report from the Conference Board in New York showed consumer confidence hit a six-year high of 112.6 in July -- its highest since August 2001 and well above an upwardly revised 105.3 in June.

"It is quite noticeable that consumers are significantly more positive about employment -- that might have people wondering if the employment report is going to be strong in July," said David Sloan, an economist with 4CAST Ltd. in New York. The Labor Department is scheduled to issue its July employment report on Friday.

In separate data, the Labor Department said second-quarter employment costs had gained by 0.9 percent, slightly faster than the first quarter's 0.8 percent rise as benefits climbed sharply.

But in 12 months through June, employment costs were up 3.3 percent, a pace moderately lower than the 3.5 percent increase in the 12-month period that ended in March and therefore unlikely to trouble the Fed.

In another report, the National Association of Purchasing Management-Chicago said its index of business activity in the Midwest declined to 53.4 in July from 60.2 in June.

That was still above the 50 level that implies expansion and both its hiring and prices components rose notably.

HOUSING SLUMP CONTINUES

Another sign of the problems facing the housing industry came in a Commerce Department report showing construction spending fell 0.3 percent in June as more commercial building failed to offset declines in homebuilding.

Spending on private residential construction slipped 0.7 percent to a $544 billion annual rate, the lowest level since March 2004 and the 16th straight month that spending to build homes has declined.

A report on home prices in major metropolitan markets -- the Standard & Poor's/Case-Shiller Home Price Index -- showed a continuing slide in prices during May, marking an 18th straight monthly decline.

Analysts said the slower pace of consumer spending would bear watching, since spending fuels two-thirds of national economic activity and any prolonged cutback could mean weaker growth ahead.

"The worry is that consumers have finally decided that saving is good and spending everything may not be the way to salvation," said economist Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa.

The concern was offset to some degree by the robust consumer confidence estimate issued by the Conference Board.

John Spinello, a Treasury bond strategist for Jeffries and Co. in New York noted that: "As someone said, you can't spend confidence, but this is a pretty huge number."