Drop in spending worst since 9/11
Poor car sales and high gasoline prices are blamed for worse-than-expected consumer spending numbers for June -- further evidence of sputtering growth.
By Tim Ahmann, Reuters
U.S. consumer spending in June took its biggest plunge since September 2001 as shoppers, sapped by high energy costs, cut back sharply on car purchases, a government report showed on Tuesday.
Personal spending dropped 0.7% in June after climbing 1% in May, according to Commerce Department data. Wall Street had braced for a mild 0.1% drop.
Adjusted for inflation, spending tumbled 0.9%.
By both measures, it was the biggest drop in consumer spending since September 2001, when shoppers retrenched in the wake of the attacks on New York and Washington.
U.S. stock markets opened lower, prices for U.S. government bonds got a lift and the dollar slipped after the report, which was seen as bolstering the case for the Federal Reserve to move cautiously as it raises interest rates from multi-decade lows. Check out your options.
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"The second quarter was a kind of disappointment, and a lot of that has to do higher energy prices. That zapped some of the demand from the economy,'' said George Mokrzan, chief economist at Huntington Financial Group in Columbus, Ohio.
Many economists are confident the economy has already begun working its way out of a spending soft spot, but a renewed rise in oil prices could throw up an economic hurdle.
U.S. light crude hit $44.24 a barrel before retreating on Tuesday, the highest price since oil futures were launched on the New York Mercantile Exchange in 1983.
Another report suggested the U.S. labor market recovery was struggling to gain momentum. Outplacement firm Challenger, Gray & Christmas said employers announced 69,572 job cuts in July, up from 64,343 in June, but down 18% from a year ago.
Rick Cobb, executive vice president at the firm, said the upcoming U.S. elections and sputtering economic growth seemed to be making employers hesitant to hire.
Hole in the pocket?
The report on consumer spending showed incomes up a tepid 0.2% in June, a slowdown from May's 0.6% gain.
After inflation and taxes, the meager income gain left consumers no better off than they had been a month earlier. The department said disposable income rose 0.2%, but was unchanged when inflation was taken into account.
Wages, which had risen 0.6% in May, were unchanged in June, the weakest reading since December.
In gross domestic product data released on Friday, which incorporated Tuesday's figures, the department had said consumer spending grew at a 1% annual rate in the second quarter, the slowest pace since the 2001 recession.
Economists said the spending slowdown, which put the brakes on overall economic growth, largely reflected weak auto sales.
Tuesday's report showed spending on expensive, long-lasting manufactured goods -- such as autos -- plunged 5.8% in June, after a 3.7% increase a month earlier, on an inflation-adjusted basis.
July may be a different story
Economists think auto sales rebounded smartly in July, and automakers have recently stepped up their buyer incentives. General Motors said on Tuesday it would offer cash rebates of up to $2,500 on some of its 2005 model vehicles.
U.S. automakers are set to report on July sales later on Tuesday, which could provide a clearer picture of how much consumer spending has snapped back.
"Our early indications suggest unit auto sales and other consumer activity bounced back quite solidly, and July might represent one of the largest gains in consumer spending in many months,'' said Steve Wieting of Citigroup Global Markets.
The Commerce report showed inflation moderated in June, with the price index for consumer purchases up just 0.2% after a 0.4% increase in May. Excluding volatile food and energy costs, inflation rose a scant 0.1% for the second month in a row.
Fed officials are set to meet next Tuesday and are widely expected to raise overnight interest rates by a quarter-percentage point to 1.5%, the second step in what they have said should be a "measured'' rate-rise campaign.
Other reports on Tuesday showed U.S. chain stores sales up from year-ago levels.
The International Council of Shopping Centers and UBS said in a report that sales rose 0.2% last week, matching the prior week's rise and up 3.1% from a year ago.
A separate report from Redbook Research showed sales at major retailers increased 3.9% last week from year-ago levels, but July sales were down 0.1% from June.
