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Consumers Dip into Savings to Boost Spending

U.S. personal income growth is strong, but spending growth is even stronger, with savings lower as a result.

That’s the key takeaway from figures released Thursday by the U.S. Department of Commerce, which found that personal disposable (after-tax) income in July increased by 2.7% on a 12-month smoothed basis, to $14.4 trillion, the biggest increase in the past nine months.

However, total consumption increased by a much bigger 4.5%, to $13.4 trillion, its fifth consecutive month of increase between 4.5% and 4.6% on a 12-month smoothed basis, with most of the rise in services spending, though spending on durables also gained. Spending on nondurables, which includes inflation, had the lowest increase of any major sectors, helped by low inflation in apparel and other key categories.

Savings as a percent of disposable income fell to 3.5% in July, its lowest level this year, and a significant decline from the approximately 6 percent savings rates levels of two years ago.

Low unemployment and the strong financial markets may be bolstering consumer confidence, causing them to spend more and save less.