Tue Aug 3, 2004
By Tim Ahmann

WASHINGTON (Reuters) - U.S. consumer spending in June took its biggest plunge since September 2001 as shoppers, sapped by high energy costs, cut back sharply on car purchases, a government report showed on Tuesday.

Personal spending dropped 0.7 percent in June after climbing 1 percent in May, according to Commerce Department data. Wall Street had braced for a mild 0.1 percent drop.

Adjusted for inflation, spending tumbled 0.9 percent.

By both measures, it was the biggest drop in consumer spending since September 2001, when shoppers retrenched in the wake of the attacks on New York and Washington.

U.S. stock markets opened lower, prices for U.S. government bonds got a lift and the dollar slipped after the report, which was seen as bolstering the case for the Federal Reserve to move cautiously as it raises interest rates from multi-decade lows.

"The second quarter was a kind of disappointment and a lot of that has to do higher energy prices. That zapped some of the demand from the economy," said George Mokrzan, chief economist at Huntington Financial Group in Columbus, Ohio.

Many economists are confident the economy has already begun working its way out of a spending soft spot, but a renewed rise in oil prices could throw up an economic hurdle.

U.S. light crude (CLc1: Quote, Profile, Research) hit $44.24 a barrel before retreating on Tuesday, the highest price since oil futures were launched on the New York Mercantile Exchange in 1983.

Another report suggested the U.S. labor market recovery was struggling to gain momentum. Outplacement firm Challenger, Gray & Christmas said employers announced 69,572 job cuts in July, up from 64,343 in June, but down 18 percent from a year ago.

Rick Cobb, executive vice president at the firm, said the upcoming U.S. elections and sputtering economic growth seemed to be making employers hesitant to hire.

HOLE IN THE POCKET?

The report on consumer spending showed incomes up a tepid 0.2 percent in June, a slowdown from May's 0.6 percent gain.
After inflation and taxes, the meager income gain left consumers no better off than they had been a month earlier. The department said disposable income rose 0.2 percent, but was unchanged when inflation was taken into account.

Wages, which had risen 0.6 percent in May, were unchanged in June, the weakest reading since December.

In gross domestic product data released on Friday, which incorporated Tuesday's figures, the department had said consumer spending grew at a 1 percent annual rate in the second quarter, the slowest pace since the 2001 recession.

Economists said the spending slowdown, which put the brakes on overall economic growth, largely reflected weak auto sales.

Tuesday's report showed spending on expensive, long-lasting manufactured goods -- like autos -- plunged 5.8 percent in June, after a 3.7 percent increase a month earlier, on an inflation-adjusted basis.

SALES TO DRIVE HIGHER?

Economists think auto sales rebounded smartly last month and automakers have recently stepped up their buyer incentives. General Motors Corp. (GM.N: Quote, Profile, Research) on Tuesday said it would offer cash rebates of up to $2,500 on some of its 2005 model vehicles.

U.S. automakers are set to report on July sales later on Tuesday, which could provide a clearer picture of how much consumer spending has snapped back.

"Our early indications suggest unit auto sales and other consumer activity bounced back quite solidly, and July might represent one of the largest gains in consumer spending in many months," said Steve Wieting of Citigroup Global Markets.

The Commerce report showed inflation moderated in June, with the price index for consumer purchases up just 0.2 percent after a 0.4 percent increase in May. Excluding volatile food and energy costs, inflation rose a scant 0.1 percent for the second month in a row.

Fed officials are set to meet next Tuesday and are widely expected to raise overnight interest rates by a quarter-percentage point to 1.5 percent, the second step in what they have said should be a "measured" rate-rise campaign.

Other reports on Tuesday showed U.S. chain stores sales up from year-ago levels.

The International Council of Shopping Centers and UBS said in a report that sales rose 0.2 percent last week, matching the prior week's rise and up 3.1 percent from a year ago.

A separate report from Redbook Research showed sales at major retailers increased 3.9 percent last week from year-ago levels, but July sales were down 0.1 percent from June.

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