Faltering consumer spending to weigh on growth

WASHINGTON Tue Aug 2, 2011 5:00pm EDT

Shoppers carry their purchases along Broadway in New York City, May 11, 2008. REUTERS/Joshua Lott

Shoppers carry their purchases along Broadway in New York City, May 11, 2008.

Credit: Reuters/Joshua Lott

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WASHINGTON (Reuters) - Consumer spending dropped in June for the first time in nearly two years and incomes barely rose, signs the economy lacked momentum as the second quarter drew to a close.

The Commerce Department said on Tuesday consumer spending slipped 0.2 percent, the first decline since September 2009, after edging up 0.1 percent in May. Adjusted for inflation, spending was flat after a 0.1 percent decline.

Incomes rose just 0.1 percent.

"It certainly gets us off on a very soft footing for the third quarter and does call into question a bit the notion of a second-half pick-up," said Julia Coronado, North America chief economist at BNP Paribas in New York. "We are not seeing it yet going into the third quarter."

The data, which was incorporated in a report on U.S. economic growth on Friday that showed the economy expanded at less than a 1 percent annual rate over the first half of the year, was the latest to underscore the recovery's frail state.

A report on Monday showed manufacturing activity hit a two-year low in July, leading some economists to dial back expectations for growth over the second half of the year.

For the third-quarter, many economists have scaled back growth estimates to around 2.5 percent from 3 percent.

"If the recovery is ever going to gain speed, it will have to come from households deciding they want to spend money again," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

There are few signs that consumers are willing to do that just yet. Companies from a wide range of U.S. industries told stories on Tuesday of slowing sales and bleak outlooks.

Wireless services provider MetroPCS Communications Inc said it was having a tough time holding onto customers and forecast its subscriber numbers would worsen in the current quarter. Conglomerate Emerson Electric Co said its industrial businesses were slowing amid sluggish growth in the United States and Europe.

U.S. stocks ended down for a seventh consecutive session, while prices for Treasury debt rallied both on the data and the approval of a deficit-cutting deal by Congress. The yield on the 30-year government bond dropped below 4 percent.

Gold raced to an all-time high of $1,640.39 an ounce and the dollar firmed broadly as the uncertain economic outlook led investors to search for a safe haven.

WEIGHING RECESSION RISKS

Consumer spending is being held back by a 9.2 percent unemployment rate, and the labor market's health could determine how fast the economy recovers its footing.

Employment grew by just 18,000 positions in June and a report on Friday is expected to show only a further 85,000 were added in July.

The spending cuts could prove a headwind for the economy. Analysts said the deal itself would likely trim only 0.1 to 0.3 percentage point from GDP growth next year.

However, JPMorgan warned that taking into account expiring stimulus, including a payroll tax cut and emergency unemployment benefits, the total fiscal drag could amount to 1.75 percentage points.

The dour data in the last few days have spurred talk the economy could tumble into a fresh recession.

Federal Reserve officials gather next week to appraise the state of the economy, but officials have signaled a reluctance to build on their aggressive monetary stimulus.

There were some relatively optimistic economic signs on Tuesday. Motor vehicle sales rose to a 12.2 million annual rate in July from 11.4 million the prior month.

Borrowing by small U.S. businesses jumped in June to the highest level in more than three years and a gauge within the spending report showed inflation subsiding.

The so-called PCE price index, which the Fed monitors closely, fell 0.2 percent, its first drop since June. A core index, which excludes food and energy costs, rose a tame 0.1 percent.

"That's a little relief for consumers and hopefully over time that will lead to a little bit of momentum in consumer spending," said BNP Paribas' Coronado.

(Editing by Kenneth Barry)

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Comments (13)
KimoLee wrote:
And it is going to fall further for this American because I am sick of prices rising for things like phone, internet, cable T.V., gas, etc. The impact on my budget is cumulative, so it is time for additional cuts to bring things back into the budget. When prices increase without demand, Americans are being ripped off by corporate America. I’m sick of being nickled and dimed to death.

Aug 02, 2011 9:06am EDT  --  Report as abuse
breezinthru wrote:
If the income data is correct, then the only people getting raises are also collecting year-end bonuses.

When the only income growth is at the top of the pyramid, how can there be increased spending? I expect the 3rd quarter GDP projections that come out on October 27 will show growth in negative numbers.

We have one foot in recession quicksand and there are no magic rabbits left in the hat.

Aug 02, 2011 9:25am EDT  --  Report as abuse
Silkster wrote:
Inflation eases??? Where?? How is $10 for a 12oz bag of coffee considered to be easing?? It’s a coffee for Gods sake! Anyone saying that inflation is easing is trying to brainwash everyone..

Aug 02, 2011 9:49am EDT  --  Report as abuse
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