Spending inches up despite income drop

As gasoline prices rose, Americans spent more in June than the previous month -- despite falling incomes. For the rest of the year, economists expect falling wages and rising unemployment to act as a drag on spending.

Consumer spending is closely watched because it accounts for about 70 percent of total economic activity and has helped lift the economy out of previous recessions. While analysts expect the economy to grow in the second half of this year, consumers aren't likely to lead the way.

Americans boosted their spending 0.4 percent in June, the Commerce Department said Tuesday, the second consecutive monthly increase. But adjusting for inflation, spending fell 0.1 percent, following a flat reading in May. Inflation-adjusted spending hasn't increased since February, the department said.

Personal income, meanwhile, dropped 1.3 percent in June, the eighth straight decline and steepest fall in four years. Incomes were inflated in May due to one-time payments from the Obama administration's stimulus program. But wages and salaries also fell 0.4 percent in June.

"The key message is that ... income remains weak" and consumers are likely to keep saving more, Paul Dales, U.S. economist at Capital Economics, wrote in a note to clients. "Under those circumstances, we expect spending to remain muted for some time."

Consumer spending may increase in July and August due to the government's "cash-for-clunkers" program, economists said, but will likely level off afterward. The program has spurred thousands of Americans to trade in old cars for newer vehicles.

"When given sufficient incentive, as in cash-for-clunkers, consumers will spend," said Nigel Gault, chief U.S. economist for consulting firm IHS Global Insight. "But reduced wealth, high debt, tight credit and a weakening labor market are all weighing on consumers."

Gas prices peaked June 22 after rising nearly every day for two months. A price index included in the income and spending report showed overall prices rose 0.5 percent in June, but were up only 0.2 percent when food and energy are excluded.

Still, the housing market continued to show signs of life as pending U.S. home sales rose in June for the fifth straight month, according to the National Association of Realtors. The group's pending home sales index rose more than expected to 94.6, from an upwardly revised reading of 91.3 in May. The last time there were five straight monthly gains was July 2003.

Americans are saving more as they seek to rebuild their nest eggs, which have been hammered by falling home values and stock portfolios amid the longest recession since World War II. While saving can be good in the long run, rapid increases can slow the economy.

A key question is how high the savings rate will climb. The department said Tuesday the personal savings rate fell to 4.6 percent in June, after jumping to 6.2 percent in May, which was the highest since February 1995. The rate dropped briefly below 1 percent last year and some economists say it could hit 8 or 9 percent by early 2010.

But the department also revised its spending and income data back to 1929, as it did last week when it reported second-quarter gross domestic product, the broadest measure of the economy's output. The changes show that Americans saved more that previously thought earlier this decade.

Bolstered by the consumer spending and housing reports, investors continued a rally that has sent stocks up 14 percent since July 10. The Dow Jones industrial average added nearly 34 points to 9,320.19, and broader indices also edged up.

The government reported last week that the overall economy, as measured by the GDP, shrank at an annual rate of 1 percent in the second quarter, far less severe than the 6.4 percent decline in the first quarter and a 5.4 percent decline in the fourth quarter of 2008.

But even as the recession bottoms out, economists expect unemployment to keep rising from its current rate of 9.5 percent to 10 percent or higher by the end of the year.

The Labor Department is scheduled to issue its July employment report Friday. Economists expect the report will show the jobless rate rose to 9.6 percent as employers cut 320,000 jobs last month, better than the 467,000 lost in June.

Sluggish consumer spending has held back the sales of food and beverage companies. Tyson Foods Inc., the world's largest meat producer, said Monday that sales fell 3 percent in its third quarter. The company posted a strong profit due to cost cuts.

And sales for MillerCoors, the U.S. joint venture owned by Molson Coors Brewing Co. and SABMiller, increased by only 1 percent in the most recent quarter, Molson Coors reported Monday.