Consumer Spending in U.S. Unexpectedly Falls for First Time in Two Years

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The value of purchases in June was the lowest of the quarter, making a third-quarter rebound more difficult. Close

The value of purchases in June was the lowest of the quarter, making a third-quarter... Read More

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Photographer: Jin Lee/Bloomberg

The value of purchases in June was the lowest of the quarter, making a third-quarter rebound more difficult.

U.S. consumer spending unexpectedly dropped in June for the first time in almost two years and savings climbed, adding to evidence that the slump in hiring is hurting household confidence.

Purchases declined 0.2 percent after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November.

The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending, which accounts for 70 percent of the world’s largest economy. Companies like Newell Rubbermaid Inc. (NWL) are among those cutting forecasts for the year.

“Consumers ended the quarter on a pretty poor note,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who projected spending would drop. “The third quarter is looking very soft too. Consumers are facing lackluster wage growth in this phase of still-high gas prices.”

Stocks dropped, erasing year-to-date gains on mounting concern the economy was faltering. The Standard & Poor’s 500 Index tumbled 2.6 percent to 1,254.05 at the 4 p.m. close in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.61 percent from 2.75 percent late yesterday.

Survey Results

Projections for spending in the Bloomberg survey ranged from an increase of 0.4 percent to a drop of 0.3 percent. The Commerce Department revised the May spending figure from a reading previously reported as being little changed.

Incomes climbed 0.1 percent in June following a 0.2 percent gain the prior month that was revised down. Economists had forecast incomes would rise 0.2 percent, according to the Bloomberg survey.

Wages and salaries were little changed, the weakest reading since November.

Americans boosted savings, a sign of growing concern over the economy and jobs. The savings rate climbed to 5.4 percent, the highest since September, from 5 percent.

Today’s report showed that adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending was little changed after dropping 0.1 percent in May. The value of purchases in June was the lowest of the quarter, making a third-quarter rebound more difficult.

Inflation Stabilizes

The Federal Reserve’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 1.3 percent from June 2010, the same as in the prior month.

Photographer: Jim R. Bounds/Bloomberg

The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending. Close

The lack of jobs combined with wage gains that have failed to keep pace with inflation... Read More

Close
Open
Photographer: Jim R. Bounds/Bloomberg

The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending.

The so-called core price index rose 0.1 percent from the prior month. The gauge was forecast to rise 0.2 percent from May, according to the survey median.

Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29. Household spending grew 0.1 percent, the weakest performance since the second quarter of 2009, at the end of the last recession.

A slump in confidence threatens to derail any recovery. The Thomson Reuters/University of Michigan index of consumer sentiment fell in July to the weakest reading since March 2009. The Bloomberg Consumer Comfort Index also dropped in the week ended July 24 to the lowest since May.

Stagnant Wages

“Wages are very stagnant and that’s affecting consumer spending and consumer confidence,” Fed Chairman Ben S. Bernanke said in semi-annual testimony to Congress on July 13. “There is also ongoing uncertainty about the durability of the recovery.”

Weekly earnings adjusted for inflation dropped 0.9 percent in the 12 months ended June on average, according to figures from the Labor Department.

The labor market is still struggling to heal. The jobless rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months. The economy also failed to create enough jobs in July to trim unemployment, economists in a Bloomberg survey said before a Labor Department report due this week.

Merck & Co., Cisco Systems Inc., and Goldman Sachs Group Inc. are among companies that announced workforce reduction plans last month.

Fuel Costs

Higher expenses for necessities like energy are also crimping purchasing power. The cost of regular gasoline climbed in May to about a three-year high of $4 a gallon, and remained above $3.70 at the end of July, according to AAA, the nation’s biggest auto group.

The “difficult” U.S. economy was among reasons Newell Rubbermaid, the Atlanta-based maker of Rubbermaid containers and Sharpie pens, last week cut its full-year profit and sales forecasts.

“The consumer environment remains very tough,” Michael Polk, chief executive officer, said on a conference call with analysts on July 29. “The key uncertainty is whether the consumer will show up and spend.”

Auto dealers are also seeing a slump. Cars and light trucks sold at an average 11.41 annual rate in June, the slowest in a year, industry data showed. Figures for July, due today, will signal vehicle sales have stalled, according to a Bloomberg survey.

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

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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