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Americans Pinch Pennies

Hit with high energy prices, consumers in June slashed their spending by the largest amount in three years.

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.

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.

The Institute for Supply Management said Monday that U.S. manufacturing expanded for the 14th consecutive month in July, boosted by new orders and higher production. The institute said its manufacturing index registered 62.0 last month, up from 61.1 in June. That was in line with the consensus forecast of analysts. An index reading above 50 indicates expansion.

But in Washington, the Commerce Department reported that construction spending slipped 0.3 percent in June after expanding a revised 0.1 percent in May. The industry is particularly sensitive to interest rates, which have been on the rise since spring. The construction report was weaker than economists expected and represented another sign that the economy hit a rough patch early in the summer.

Last week, the Commerce Department reported that the U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the last recession.

The size of the slowdown caught economists by surprise.
Many were looking for stronger second quarter growth of 3.6 percent, according to a survey conducted by CBS MarketWatch.

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 1/4 percentage point in a bid to keep inflation from becoming a problem.