Americans Cut Spending For First Time In 20 Months

August 2, 2011 by USA Post 

Americans Cut Spending For First Time In 20 MonthsAmericans Cut Spending For First Time In 20 Months, Americans reduced their spending in June for the first time in nearly two years after seeing their incomes grow by less than nine months. The latest data offered a troubling sign for an economy that is adding a few jobs and growth barely.

Consumer spending fell 0.2 percent in June, the Commerce Department said Tuesday. It was the first decline since September 2009.

Some of the decline was the result of food prices and energy following a sharp increases moderating earlier this year. Excluding spending on these items, consumer spending held steady.

However, consumers cut back on expensive items like cars and appliances that help drive growth.

Revenue rose 0.1 percent, the smallest increase since September. Many people also are pocketing more than their salaries. The personal savings rate rose to 5.4 percent of after-tax income, the highest since August 2010.

The data confirmed the report last week showed the economy expanded at an annual rate of only 1.3 percent in the spring after only 0.4 percent growth in the first three months of the year. He also noted that consumer spending softened at the end of April-June quarter, which could mean the slow economy is worsening.

Stocks fell after the report was released. The Dow Jones industrial average fell more than 100 points in morning trading. Broader stock indicators also declined.

“The recent spate of weak economic news has made us more worried that any recovery will be more modest than looked likely,” said Paul Dales, U.S. economist at Capital Economics.

High gas prices and unemployment have reduced the budgets of households this spring. Many Americans are cutting purchases of autos, furniture, appliances and electronics. Consumer spending is closely watched because it accounts for 70 percent of economic activity.

Employers have responded by reducing recruitment. The economy added just 18,000 net jobs in June, less than nine months. The unemployment rate rose to 9.2 percent, the highest level this year.

The government issues its employment report for July, Friday.

Companies are creating fewer jobs despite reporting strong earnings and sitting on cash reserves.

“What worries me is that companies are taking their strong earnings growth through productivity gains, wage increases limited activities abroad,” said Joel Naroff of Naroff Economic Advisors. “While that may be good for individual companies when most companies do that, increase in revenue spending so limited, and finally fades growth. That is the problem we are facing.”

The biggest drop came in spending on items such as food and gasoline. Spending on nondurable goods such fell 5.5 percent, reflecting price declines after the peak earlier this year. An inflation gauge tied to consumer spending fell 0.2 percent in June, the biggest one-month drop since September 2009. Outside food and energy prices rose 0.1 percent.

However, spending on durable goods like cars, also fell in June by 1.1 percent. One of the reasons for the decline may be shortage of popular models of cars at dealerships. Interruptions in the supply chain caused by the earthquake of March in Japan, have limited the production of automobiles and electronics.

Manyanlysts remain hopeful that growth will recover in the second half. They expect the automobile production and sales to pick up once the chain of supply disruptions ease.

But change cannot come for a while. Manufacturers had the weakest growth in two years in July, according to the Institute for Supply Management.

And gas prices remain high even after falling from a peak of nearly 4 per gallon in early May. The average price per gallon was 3.70 and on Tuesday – 14 cents more than last month and nearly a dollar more than the same month last year.

Some economists have begun to cut their forecasts for the second half. Dales and colleagues at Capital Economics have cut their growth prospects in the second half of 2 percent, compared with a previous forecast of 2.5 percent growth in the second half of this year.

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