Covering The Economy

Aug 2, 2011 8:48 AM

Americans Cut Spending For First Time In 20 Months

WASHINGTON (AP) - Americans cut back on their spending in June for the first time in nearly two years and their incomes grew by the smallest amount in nine months, a troubling sign for an economy that is barely growing.

Consumer spending dropped 0.2 percent in June, the Commerce Department said Tuesday. Excluding falling prices for such items as energy and food, consumer spending would have been unchanged in June.

Incomes rose 0.1 percent. It was the weakest growth in income since September, reflecting anemic hiring this spring.

Stock futures were trading lower after the report was released.

High gas prices and unemployment have squeezed household budgets this spring, leading to tepid overall economic growth in the April-June quarter. The economy expanded at an annual rate of 1.3 percent in the second quarter after only 0.4 percent growth in the first three months of this year. The combined growth for the first six months of this year was the worst since the recession ended two years ago.

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.

Declining growth and rising unemployment have raised concerns that the country could fall back into a recession.

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. Many auto dealers reported shortages of popular models after Japan's March 11 earthquake limited production of parts. That cut into auto sales.

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.

The private trade group of purchasing executives said Monday that its index of manufacturing activity fell to 50.9 percent in July from 55.3 percent in June. The reading was the lowest since July 2009 - one month after the recession officially ended.

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. Economists at Capital Economics said they had 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.

Copyright 2011 by The Associated Press. All Rights Reserved.

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