Consumers Cut Back on Buying
American consumer spending dropped 0.7% in June, the steepest monthly fall since September 2001, the government reported Tuesday. With income growth stalling as well, the numbers raised new concerns about the strength of the economic expansion.
Overall personal income -- which includes wages, salaries and income from dividends, interest and other sources -- rose by 0.2% in June, the slowest monthly increase in more than a year, the Commerce Department reported.
But personal income was flat after adjusting for inflation and taxes, the report showed. Wages and salaries fell after adjusting for inflation.
The figures were so weak that some economists speculated that Federal Reserve policymakers might consider leaving their short-term interest rate target unchanged at 1.25% when they meet next week, rather than raise it to 1.50% as widely expected.
The June results “raise increasingly serious questions about the strength and sustainability of the economy in the months ahead,” said Charles McMillion, president of MBG Information Services.
Fed Chairman Alan Greenspan said last month on Capitol Hill that the economy had hit a temporary “soft patch” but that it should not hinder an expansion that appears to be broadening and gaining momentum.
Several economists viewed the June figures as an aberration and said both the economy and the Fed probably would stay on track. Lehman Bros. Global Economics continued to predict that the Fed would raise its target by a quarter of a point at each of the four remaining scheduled policymaking meetings this year.
Most of the decline in spending was attributed to a sharp fall in auto sales, as shoppers shunned dealers’ attempts to trim rebates and other financial incentives. Spending on such big-ticket “durable goods” declined 5.9% in June. But spending on other goods also fell, by 0.3%, while spending on services rose by a tepid 0.2%.
The income figures showed that auto pricing was not wholly to blame for the consumer pull-back. Job growth also slowed in June, and consumer prices rose by 0.2%, according to a Commerce Department measure. Gasoline prices also soared in May to a record high national average of $2.054 for a gallon of unleaded regular, which took a bite out of many household budgets.
After excluding volatile food and energy prices, the department’s so-called core measure showed consumer prices rising just 0.1% in June and 1.5% in the 12 months that ended in June.
