Oil price falls and consumer spending buoy US economy

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The Independent Online

Hopes that the US economy will recover from its recent "soft patch" were buoyed yesterday when oil prices fell and official figures showed that consumers returned to the country's shopping malls last month.

Hopes that the US economy will recover from its recent "soft patch" were buoyed yesterday when oil prices fell and official figures showed that consumers returned to the country's shopping malls last month.

US light crude dipped 90 cents to $42.28 a barrel on the New York Mercantile Exchange. Oil has fallen 15 per cent as tension in Iraq has eased since peaking at a record $49.40 ten days ago.

American consumer spending rose 0.8 per cent in July, boosted by retail and car sales - more than compensation for a revised 0.2 per cent fall in June, government data revealed.

Initial figures had suggested personal spending fell 0.7 per cent in June, setting alarm bells ringing about the recovery in the world's biggest economy on the eve of the presidential election.

Economists are remaining on standby for the all-important employment report for August, due on Friday, after a separate measure showed personal income struggling to keep up with the revival in consumer spending. Personal income rose just 0.1 per cent in July compared with a 0.2 per cent gain the previous month - its weakest reading since November 2002.

Patrick Franke, US economist at Commerzbank, said: "US households are certainly stretched at this point as is evident from the low savings rate. Job and income growth are therefore absolutely vital for the sustainability of the expansion."

Disposable incomes have slowed since last year, when President Bush's tax cuts gave people more money to spend. Wal-Mart, the world's biggest retailer, shocked Wall Street when it cut its August sales forecast, blaming disappointing back-to-school sales. Retailers such as Krispy Kreme have blamed the soaring cost of oil for slowing sales, claiming the high cost of gasoline means consumers had less money for shopping.

Separately, a measure of inflation was unchanged in July, suggesting the Federal Reserve, which has started tightening the base rate, has inflation under control. The price index for consumer purchases and core prices was unchanged last month.

Wall Street predicts Friday's employment report will show 160,000 jobs were created this month, a rebound from July's disappointing 32,000 new jobs.

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