- The Washington Times - Tuesday, August 3, 2004

ASSOCIATED PRESS

Consumers, the lifeblood of the economy, clutched tight to their wallets in June and caused the largest spending drop in three years.

The Commerce Department reported yesterday that consumers cut their spending by 0.7 percent in June from the previous month as high energy prices and a sluggish job market made for more cautious buyers.

Because the buying retreat came off a strong 1 percent rise in consumer spending in May, some economists believed it was just a temporary lull. Others weren’t so sure, however, saying the disappointing showing in June raised questions about consumers’ future willingness to spend.

Americans’ incomes, the fuel for future spending, rose by 0.2 percent in June, down from a solid 0.6 percent increase the previous month.

The figures are not adjusted for price changes.

“Jobs will be the key factor to get income and spending back on track,” said Lynn Reaser, chief economist at Banc of America Capital Management.

The nation’s payrolls grew by 112,000 in June, half the number analysts had forecast. Economists are predicting a rebound in July, however, with job growth in the 200,000 range. The government releases the employment report for July on Friday.

Consumer spending accounts for about two-thirds of economic activity in the United States. Thus, it plays a crucial role in shaping an economic recovery.

Federal Reserve Chairman Alan Greenspan, appearing before Congress last month, acknowledged that the economy had hit a rough patch in June. He said higher energy prices had sapped consumer spending but predicted that the softness in spending would be short-lived.

Mr. Greenspan expressed confidence that economic growth, which slowed to a 3 percent annual rate in the second quarter of this year, would pick up momentum in coming months. He noted that anecdotal data for July seemed promising.

In June, though, the latest snapshot of consumer spending was weaker than economists expected. They forecast for June a 0.1 percent dip in spending, rather than 0.7 percent, and a 0.3 percent rise in incomes instead of the actual 0.2 percent.

“These are sour numbers. There is no sugarcoating that,” lamented economist Ken Mayland, president of ClearView Economics. “Consumers were confronted with a whole range of high prices, including energy, and they balked.”

The 0.7 percent decline in spending was the first since September 2003 and the largest drop since September 2001.

The decline was led by a cutback in spending on automobiles and other big-ticket durable goods. Spending on durable goods declined by 5.9 percent in June, compared with a 3.7 percent rise in May. For nondurables such as food and clothes, spending dipped by 0.3 percent, after a 1.4 percent increase. Spending on services rose by 0.2 percent, down from a 0.3 percent increase.

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