Consumer Spending and Incomes in U.S. Stagnate

Consumer spending, pending home sales and factory orders were all weaker than projected in June, showing the U.S. recovery lost momentum heading into the second half of the year as employment stagnates.

Household purchases, which account for about 70 percent of the economy, were unchanged from May, according to figures from the Commerce Department issued today in Washington. Contracts to buy existing houses unexpectedly dropped for a second month and factory bookings fell more than twice as much as economists estimated, other reports showed.

Stocks dropped, depressed by earnings at companies like Procter & Gamble Co. that showed some Americans are cutting spending on name brands as the jobless rate hovers near 10 percent. Slower growth means it will take even longer to regain the 8.4 million jobs lost during the worst economic slump since the 1930s.

“The consumer is less willing to spend,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia, who projected purchases would stall. “Soft labor markets are likely to remain so through 2013. There’s not a lot of opportunity for income growth.”

The Standard and Poor’s 500 Index fell 0.5 percent to 1,120.46 at the 4 p.m. close in New York as shares of Procter & Gamble slumped 3.4 percent. The dollar dropped and Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.91 percent from 2.96 percent late yesterday.

Less Than Projected

The median estimate of 76 economists surveyed by Bloomberg News called for a 0.1 percent gain in spending. Projections ranged from a decrease of 0.3 percent to a 0.3 percent gain.

Incomes also stagnated in June, failing to increase for the first time since September, compared with a 0.2 percent gain projected by the survey median. Wages and salaries in June fell 0.1 percent, the first drop since September.

Procter & Gamble, the world’s largest household-products maker, today forecast first-quarter profit that fell short of analysts’ projections. The maker of Olay skin products, Pampers diapers and Tide detergent has increased promotions and new products to capture customers from competitors. Some money- conscious consumers have switched to cheaper generic items as they strive to recover from the recession.

“We see a mix effect as consumers without jobs or in challenging positions trade down,” Chief Executive Officer Bob McDonald said today on a conference call.

Bernanke’s View

Federal Reserve Chairman Ben S. Bernanke said yesterday he was counting on a pickup in wages to boost consumer spending, which accounts for about 70 percent of the economy.

“We have a considerable way to go to achieve a full recovery in our economy,” Bernanke said in a speech to southern U.S. state lawmakers in Charleston, South Carolina. Still, “rising demand from households and businesses should help sustain growth,” and consumer spending “seems likely to pick up in coming quarters from its recent modest pace.”

The savings rate for American households increased to 6.4 percent, the highest level since June 2009, to $725.9 billion.

“Consumers are still a bit cautious,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “The biggest driver for spending is going to be jobs. You need stronger economic growth to generate job growth.”

The jobless rate climbed to 9.6 percent last month from 9.5 percent in June, economists forecast a Labor Department report Aug. 6 will show. Payrolls probably dropped by 60,000 workers, reflecting a drop in temporary government employees as the census wound down, the survey also showed.

Housing Slump

A lack of jobs is one reason Americans aren’t buying houses. The number of contracts to purchase previously owned houses fell 2.6 percent in June, indicating demand kept unraveling after the expiration of a homebuyer tax credit.

The index of pending home resales dropped to 75.7, the lowest level since data began in 2001, figures from the National Association of Realtors showed. Economists projected sales would rebound 4 percent following a 30 percent plunge in May that was also the biggest on record.

The end of the government tax credit worth as much as $8,000 on April 30 means a sustained recovery in housing now depends on employment and wage gains.

“We’re still seeing the aftereffects of the homebuyer tax credit expiration,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who forecast a decline in June pending home sales. “The comeback from the housing downturn is likely to be sluggish.”

Manufacturing Cools

Even manufacturing, which led the world’s biggest economy out of the economic slump, is cooling. Orders placed with factories declined 1.2 percent, more than double the 0.5 percent drop projected by the median forecast of economists surveyed.

Smaller increases in consumer spending and inventories may offset gains in business investment and growing exports, leading to a more sustainable factory expansion.

“A downshift in the manufacturing boom is under way,” said Aaron Smith, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “This shouldn’t be taken as a signal of widespread weakening. Businesses still have expansion in their sights and will provide the fuel for growth.”

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

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