U.S. incomes rise, but spending lull hurts economy

Consumer spending grew by just 1.5 percent this spring, and not nearly enough to jump start growth and create jobs. CBS News

(MoneyWatch) Although Americans' wages are up slightly, they're keeping atight hold on their wallets, according to new federal data.

That's a mixed bag for the U.S. economy, providing the fuel for future consumer spending without doing much in the short-term to boost sluggish growth and reduce the nation's stubbornly high unemployment rate.

Personal income increased by $61.8 billion, or 0.5 percent from May to June, while income after social insurance and income taxes rose 0.3 percent, the U.S. Commerce Department reported today. That was the sharpest increase in income in the past three months. 

Yet that increase in wages is not propelling a hike in spending. Personal expenditures fell $1.3 billion in June, or 0.1 percent, compared with the previous month. In a statement, Acting Commerce Secretary Rebecca Blank acknowledged that these economic concerns, such as the ongoing financial crisis in Europe, is damping consumer spending and restraining economic growth.

"Today's release shows that personal income grew by 3.5 percent over the past year, and that it has increased 30 out of the past 34 months," she said. "Most of these gains have come from increases in private-sector wages, which rose 4.2 percent. However, personal income growth continues to be weighed down by several factors, including flat growth in income from government employment. Further, our economy continues to face other headwinds, including the economic turmoil in Europe."

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Consumer spending drives two-thirds of U.S. economic growth, so the economy tends to stall when personal consumption shrinks. With people pulling back on their purchases of groceries, electronics, and other goods, companies tend to cut down on production and put off hiring. Until economic demand rises significantly, unemployment is likely to remain relatively high.

Savings rates are also at their highest rate in a year, a sign that many Americans remain anxious about the economy and their future prospects. Yet putting more money away now could put Americans in a better position to spend if the economy improves later this year.

"The drop in consumer spending fits with this slowdown theme that we have experienced in the second quarter of this year," said Gary Schlossberg, senior economist with Wells Capital Management in San Francisco. "But there are a couple of silver linings. We saw a pretty good increase in income, and the savings rate moved back up. That gives consumers some dry powder to start spending again later in the year."

Households are now in the best financial shape they've been in years, with the lowest debt payments since 1993, Schlossberg said. There's also significant pent-up demand for a variety of goods and services that Americans have withheld from buying over the past five years as they tried to shed debt and rebuild their personal finances.

Of course, economics is always a balancing act between short- and long-term needs. "It's a double-edged sword," Schlossberg said. "You want to see incomes rising and savings rising so households are in a better position. On the other hand, if no one is spending, the economy is not going to recover."

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