INSTANT VIEW: Personal income falls unexpectedly in July

NEW YORK (Reuters) - U.S. personal income tumbled unexpectedly in July and spending slowed as the effects of government stimulus wore off and an inflation measure was at a 17-year high, a government report released on Friday showed.

KEY POINTS: * Personal income fell 0.7 percent in the month, the sharpest decline since a 2.3 percent plunge in August 2005 after Hurricane Katrina, the Commerce Department said. Analysts were expecting July income to stay flat. * Consumer spending, which accounts for about two-thirds of national economic activity, rose 0.2 percent, as expected, the slimmest gain since February, after gaining 0.6 percent in June. However, inflation-adjusted spending dropped by 0.4 percent, the sharpest slide in four years. * Inflation, as measured by the year-over-year rise in the personal consumption expenditures index, rose 4.5 percent, the steepest since February 1991, the government said. When volatile food and energy costs were stripped out, the core PCE rose 2.4 percent, the biggest since February 2007. * Core PCE was up 0.3 percent from the previous month, in line with expectations.

COMMENTS:

PAUL ASHWORTH, SENIOR U.S. ECONOMIST, CAPITAL ECONOMICS

LTD, LONDON:

"The 0.4 percent month-over-month contraction in real U.S. consumption in July, following a 0.1 percent decline the month before, means that consumption is almost sure to contract over the third quarter as a whole. Moreover, with consumer confidence still very low, unemployment rising and the boost from the tax rebates behind us, we could see a substantial decline in personal spending."

"Overall, there are a lot of negatives for consumption right now and precious few positives. With consumption falling we suspect that the overall economy will contract too even after allowing for the strength of exports."

IAN SHEPHERDSON, CHIEF U.S. ECONOMIST, HIGH FREQUENCY

ECONOMICS, VALHALLA, NEW YORK:

"July personal income fell 0.7 percent, much weaker than the consensus -0.2 percent, while nominal spending rose 0.2 percent, in line with consensus.

With the headline deflator up 0.6 percent, thanks to the final leap in energy prices, real spending fell, the second straight decline. The core deflator rose 0.3 percent, as expected. Real spending was weakest in durable goods, no surprise there as this sector includes cars and sales plunged in July. Total real spending on durables fell 1.6 percent, with non-durables down a hefty 0.9 percent and services unchanged. With real spending down in June too, by 0.1 percent, the starting point for the third quarter is very soft. With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers, and we expect an outright decline in real third-quarter consumption."

STEVEN WIETING, SENIOR ECONOMIST, CITIGROUP, NEW YORK:

"The effects of the tax rebates rolling on and off are relatively large. Wage income is, in total, still growing at a moderate pace. It is no match for strong inflation, but if we can manage to keep gasoline and food prices on a more level basis... then you will not see a very sharp drop in consumption. But it's still kind of challenging."

ALAN RUSKIN, CHIEF INTERNATIONAL STRATEGIST, RBS GREENWICH

CAPITAL, GREENWICH, CONNECTICUT:

"The perfect storm continues to hurtle onshore, given wages, fuel and food costs, the woes of tighter credit and negative wealth effects. There is not that much that the market did not know here, but it is a reminder that the third quarter and particularly the fourth quarter will look a good deal worse than the second; that was a nice tax-induced brief look in the rear view mirror."  Continued...