US Consumers threw in the towel in June with Americans cut spending for first time in 20 months.

Americans cut their spending in June for the first time in nearly two years after seeing their incomes grow by the smallest amount in nine months. The latest data offered a troubling sign for an economy that is adding few jobs and barely growing.

Consumer spending dropped 0.2 percent in June, the Commerce Department said Tuesday. It was the first decline since September 2009.

Some of the decline was the result of food and energy prices moderating after sharp increases earlier this year. When excluding spending on those items, consumer spending was flat.

Still, consumers also cut back on big-ticket items, such as cars and appliances, which help drive growth.

Incomes rose 0.1 percent, the smallest gain since September. Many people are also pocketing more of their paychecks. The personal savings rate rose to 5.4 percent of after-tax incomes, the highest level since August 2010.

The biggest drop in spending occurred in such items as food and gasoline. Spending on such non-durable goods fell 5.5 percent, reflecting price declines after spikes early this year. An inflation gauge tied to consumer spending dropped 0.2 percent in June, the biggest one-month decline since September 2009. Outside of food and energy, prices were up 0.1 percent.

Savings Rate Increases as Spending Declines

Consumers spent less on food and gas because of declining prices but did not spend more elsewhere to make up for it. Since wages rose (barely), the savings rate went up.

Did economists expect this?

Bloomberg has the answer in Consumer Spending in U.S. Fell in June

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

In spite of two horrendous jobs reports and multiple other data points including shipping data released a few days ago and a pathetic ISM report that shows manufacturing is on the verge of contraction, I am pleased to report that optimism still reigns supreme in economists, on average. Most are still looking for a second-half recovery.

Mike “Mish” Shedlock
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