By Jeannine Aversa
The Associated Press
WASHINGTON - Consumers, the lifeblood of the economy, clutched tightly to their wallets in June and caused the largest spending drop in three years.
The Commerce Department reported Tuesday 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, and they said the disappointing showing in June raised new 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 month before.
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 just 112,000 in June, half the amount 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 roughly 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.
In June, the latest snapshot of consumer spending was weaker than economists expected. They forecast for June a tiny 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.
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.
Economists still expect the Federal Reserve to boost short-term interest rates again when it meets Tuesday. The Fed increased interest rates June 30 for the first time in four years. It raised a key rate to 1.25 percent, from a 46-year low of 1 percent.
Economists believe the Fed will raise rates next week by another one-quarter percentage point.
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