July 2 (Bloomberg) -- Americans’ wages are starting to buckle under the strain of mounting unemployment, threatening to erode the consumer spending essential to an economic recovery.

Earnings per hour climbed at a 0.7 percent annual pace on average over the last three months, the smallest gain since records began in 1964, figures from the Labor Department showed today in Washington. Payrolls fell more than anticipated and the jobless rate rose to a 26-year high, the report indicated.

“When we do get a recovery, it won’t be much of one,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “There’s no bargaining power for workers. Discretionary income is just cratering, and this will have a profound effect on the economy.”

Employers are not only being stingy with raises, they are also cutting back on hours, causing the average weekly paycheck to drop to $611.49 in June, down 0.5 percent since February. The squeeze is unlikely to end soon, because there are 14.7 million workers who have been without a job for an average 24.5 weeks, the longest since records began in 1948.

“Employers don’t have to pay workers so much because there’s a queue of people waiting outside to get a job,” said Heidi Shierholz, an economist at the Economic Policy Institute in Washington, a research group typically aligned with the labor movement. “It’s reducing workers’ ability to negotiate higher wages. We’re looking at a couple of years of really slow wage growth, possibly even lower than inflation.”

Stocks, Treasuries

Stocks fell and Treasuries rose after the jobs report. The Standard & Poor’s 500 Index closed down 2.9 percent at 896.42 in New York. The yield on the 10-year note fell to 3.498 percent at 6 p.m. from 3.538 late yesterday.

Today’s report showed employers cut 467,000 workers from payrolls last month after a 322,000 decline in May. The jobless rate jumped to 9.5 percent, the highest since August 1983. Hourly earnings were up 2.7 percent from June 2008, the smallest gain since September 2005.

The average workweek for private production and non- supervisory workers fell to 33 hours, the fewest since records began in 1964, from 33.1 hours in May.

The U.S. has lost 6.5 million jobs since the recession began in December 2007, the Labor report showed. All growth in jobs in the U.S. over the last nine years has now been wiped out, and the economy currently has fewer jobs than in May 2000, according to the policy institute.

Newest Hurdle

Stagnant wages are the newest hurdle facing American households, whose spending accounts for 70 percent of the economy. As recently as the three months ended in December 2008, hourly wages were growing at a 4.2 percent annual clip on average, even as the economy lost almost 1.7 million jobs.

Pay “was the last labor-market indicator to deteriorate in this recession, and it’ll be the last one to pick up,” Shierholz said. “That’s a sign of a further drain on consumption, just what we don’t need right now.”

Industries including manufacturing, wholesalers, retailers, utilities and leisure and hospitality cut average hourly earnings last month, today’s report showed.

“Scattered reports of outright wage deflation are becoming more widespread,” Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York, said in a note to clients. “Workers appear willing to take the wage cuts, which makes this recession very unusual.”

Planned Cuts

Gannett Co., the largest U.S. newspaper owner, said it will cut about 1,400 publishing jobs and decrease wages for broadcast employees by as much as 6 percent this month. Utility owner Exelon Corp. said it plans to freeze executive pay, trim annual and long-term incentives, and slash about 500 jobs.

Tax cuts and Social Security payments under the Obama administration’s stimulus plan temporarily propped up disposable incomes in April and May, supporting household purchases. Consumer spending rose in May as personal incomes climbed 1.4 percent, the most in a year, the Commerce Department reported last week. Additional gains may be in question once the government assistance fades.

“The only wage growth we are getting is through government transfer payments, and that can’t go on,” said Deutsche Bank’s LaVorgna. “Even that isn’t enough.”

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: July 2, 2009 18:01 EDT