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Americans spending less, saving more, a sign of economic trouble

A woman carries shopping bags in New York City on Tuesday. A new report shows consumer spending was less than expected for the month of June, declining 0.2 percent, the first drop in about two years.

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A woman carries shopping bags in New York City on Tuesday. A new report shows consumer spending was less than expected for the month of June, declining 0.2 percent, the first drop in about two years.

WASHINGTON — Americans cut their spending in June for the first time in nearly two years after seeing their incomes grow by the smallest amount in nine months. The latest data offered a troubling sign for an economy that is adding few jobs and barely growing.

Consumer spending dropped 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 and energy prices moderating after sharp increases earlier this year. When excluding spending on those items, consumer spending was flat.

Still, consumers also cut back on big-ticket items, such as cars and appliances, which help drive growth.

Incomes rose 0.1 percent, the smallest gain since September. Many people are also pocketing more of their paychecks.

The personal savings rate rose to 5.4 percent of after-tax incomes, the highest level since August 2010.

The data confirmed last week's report that showed the economy expanded at an annual rate of just 1.3 percent in the spring after only 0.4 percent growth in the first three months of the year.

It also highlighted that consumer spending softened at the end of the April-June quarter, which could mean the sluggish economy is worsening.

"The recent run of weak economic news has made us more concerned that any rebound will be more modest than previously looked likely," said Paul Dales, senior U.S. economist at Capital Economics.

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 Friday.

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

"What worries me is that businesses are deriving their strong earnings growth through productivity gains, limited wage increases and foreign activities," said Joel Naroff of Naroff Economic Advisors. "While that may be good for an individual firm, when most companies do that, income gains become so limited that spending and, ultimately, growth fade. That is the problem we are now facing."

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.

But the turnaround might not come for a while. Manufacturers had their weakest growth in two years in July, according to the Institute for Supply Management.

Some economists have begun to trim their forecasts for the second half of the year. Dales and his colleagues at Capital Economics have 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.

Americans spending less, saving more, a sign of economic trouble 08/02/11 [Last modified: Tuesday, August 2, 2011 9:03pm]
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