Consumer Spending Drops by 0.7 Percent

Would you buy a used car from this man?


By JEANNINE AVERSA, Associated Press Writer

WASHINGTON - Consumers slashed their spending in June by the largest amount in three years as high energy prices took a toll on their wallets and made them more cautious buyers.

The Commerce Department reported Tuesday that consumer spending dropped by a sharp 0.7 percent in June from the previous month. The retrenchment came after consumers splurged in May, ratcheting up spending by a strong 1 percent.

Americans' incomes rose by 0.2 percent in June, down from a solid 0.6 percent increase the month before.

The figures are not adjusted for price changes.

The latest snapshot of consumer spending was weaker than economists were expecting. They were forecasting a tiny 0.1 percent dip in spending and a 0.3 percent rise in incomes for June.

"These are sour numbers. There is no sugar coating that," lamented economist Ken Mayland, president of ClearView Economics. "Consumers were confronted with a whole range of high prices, including energy, and they balked."

On Wall Street, stocks fell. The Dow Jones industrials lost 39 points and the Nasdaq was off 17 points in morning trading.

Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus it plays a key role in shaping an economic recovery.

Federal Reserve Chairman Alan Greenspan, appearing before Congress last month, acknowledged that the economy had hit a soft spot in June. He said that higher energy prices had sapped consumer spending but he predicted that the softness in spending would be short-lived.

Greenspan expressed confidence that the economy, which grew by a disappointing 3 percent annual rate in the second quarter of this year, would pick up momentum in the coming months. He noted that anecdotal data for July seemed promising.

In June though, the weakness in consumer spending was fairly widespread.

The 0.7 percent decline in spending was the first since September 2003 and the largest drop since September 2001.

The decline was led by a cutback in spending on automobiles and other big-ticket durable goods. Spending on durable goods declined by 5.9 percent in June, compared with a 3.7 percent rise in May. For nondurables such as food and clothes, spending dipped by 0.3 percent, following a 1.4 percent increase. Spending on services rose by 0.2 percent, down from a 0.3 percent increase.

Greenspan and other economists have noted that auto sales after a bad June have improved in July as dealers offer more generous incentives to boost sales.

Wages were flat in June after a 0.6 percent rise in May. That reflected a sluggishness that hit the job market, causing businesses to show more caution in hiring in June.

Tuesday's report is consistent with a string of other economic data in June — including the employment report, retail sales and industrial production — that suggested the economy took a bit of a breather during that month.

Even so, economists are still expecting the Federal Reserve to boost short-term interest rates again when it meets next on Aug. 10. The Fed on June 30 increased interest rates for the first time in four years. It raised a key rate to 1.25 percent, from a 46-year low of 1 percent at that time.

Economists believe the Fed will raise rates next week by another one-quarter percentage point in a bid to keep inflation from becoming a problem.

Crude oil futures prices, meanwhile, surpassed $44 a barrel, suggesting that consumers — and businesses — could face a further financial squeeze in coming months.

Light crude for September delivery traded as high as $44.24 a barrel in electronic trading ahead of the opening on the New York Mercantile Exchange. Later, prices backed off to $43.98 a barrel, but that was above Monday's closing level of $43.82 a barrel — the highest closing price since U.S. light crude futures began trading on Nymex in 1983.