Americans cut spending for first time in 20 months

MARTIN CRUTSINGER

AP Eco­nom­ics Writer

WASHINGTON — Amer­i­cans cut their spend­ing in June for the first time in nearly two years after see­ing their incomes grow by the small­est amount in nine months. The lat­est data offered a trou­bling sign for an econ­omy that is adding few jobs and barely growing.

Con­sumer spend­ing dropped 0.2 per­cent in June, the Com­merce Depart­ment said Tues­day. It was the first decline since Sep­tem­ber 2009.

Some of the decline was the result of food and energy prices mod­er­at­ing after sharp increases ear­lier this year. When exclud­ing spend­ing on those items, con­sumer spend­ing was flat.

Still, con­sumers also cut back on big-ticket items, such as cars and appli­ances, which help drive growth.

Incomes rose 0.1 per­cent, the small­est gain since Sep­tem­ber. Many peo­ple are also pock­et­ing more of their pay­checks. The per­sonal sav­ings rate rose to 5.4 per­cent of after-tax incomes, the high­est level since August 2010.

The data con­firmed last week’s report that showed the econ­omy expanded at an annual rate of just 1.3 per­cent in the spring after only 0.4 per­cent growth in the first three months of the year. It also high­lighted that con­sumer spend­ing soft­ened at the end of the April-June quar­ter, which could mean the slug­gish econ­omy is worsening.

Stocks fell after the report was released. The Dow Jones indus­trial aver­age dropped more than 100 points in morn­ing trad­ing. Broader indexes also declined.

“The recent run of weak eco­nomic news has made us more con­cerned that any rebound will be more mod­est than pre­vi­ously looked likely,” said Paul Dales, senior U.S. econ­o­mist at Cap­i­tal Economics.

High gas prices and unem­ploy­ment have squeezed house­hold bud­gets this spring. Many Amer­i­cans are cut­ting back on pur­chases of cars, fur­ni­ture, appli­ances and elec­tron­ics. Con­sumer spend­ing is closely watched because it accounts for 70 per­cent of eco­nomic activity.

Employ­ers have responded by reduc­ing hir­ing. The econ­omy added just 18,000 net jobs in June, the fewest in nine months. The unem­ploy­ment rate rose to 9.2 per­cent, the high­est level this year.

The gov­ern­ment issues its July employ­ment report on Friday.

Busi­nesses are cre­at­ing fewer jobs despite report­ing strong earn­ings and sit­ting on large cash reserves.

“What wor­ries me is that busi­nesses are deriv­ing their strong earn­ings growth through pro­duc­tiv­ity gains, lim­ited wage increases and for­eign activ­i­ties,” said Joel Naroff of Naroff Eco­nomic Advi­sors. “While that may be good for an indi­vid­ual firm, when most com­pa­nies do that, income gains become so lim­ited that spend­ing and ulti­mately growth fades. That is the prob­lem we are now facing.”

The biggest drop in spend­ing occurred in such items as food and gaso­line. Spend­ing on such non-durable goods fell 5.5 per­cent, reflect­ing price declines after spikes early this year. An infla­tion gauge tied to con­sumer spend­ing dropped 0.2 per­cent in June, the biggest one-month decline since Sep­tem­ber 2009. Out­side of food and energy, prices were up 0.1 percent.

Still, spend­ing on durable goods, such as autos, also fell in June 1.1 per­cent. One rea­son for the decline may be the short­age of pop­u­lar car mod­els in show­rooms. Sup­ply chain dis­rup­tions caused by the March earth­quake in Japan have lim­ited pro­duc­tion of auto and elec­tronic parts.

Many ana­lysts are still hope­ful that growth will rebound in the sec­ond half of the year. They expect auto pro­duc­tion and sales to pick up once sup­ply chain dis­rup­tions ease.

But the turn­around may not come for a while. Man­u­fac­tur­ers had their weak­est growth in two years in July, accord­ing to the Insti­tute for Sup­ply Management.

And gas prices remain high, even after com­ing down from their peak of nearly $4 a gal­lon in early May. The aver­age price for a gal­lon was $3.70 on Tues­day — 14 cents higher than a month ago and almost a dol­lar more than the same month last year.

Some econ­o­mists have begun to trim their fore­casts for the sec­ond half of the year. Dales and his col­leagues at Cap­i­tal Eco­nom­ics have cut their out­look for sec­ond half growth to 2 per­cent, down from a pre­vi­ous fore­cast of 2.5 per­cent growth in the sec­ond half of this year.

Posted by AP News on Aug 2 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.