Tom Abate
San Francisco Chronicle Staff Writer
August 4, 2004

Consumer spending fell 0.7 percent in June, its biggest tumble in three years, raising the question of whether recent reports of economic softness represent a blip or a trend.

In a report released Tuesday, the Commerce Department also said personal income rose just 0.2 percent in June after a solid 0.6 percent advance in May. With consumer spending responsible for two-thirds of all economic activity, the unexpectedly large drop helped put Wall Street in a bearish mood and drove major stock indexes slightly lower.

The Commerce Department said spending in June dipped across the board but was driven by an especially pronounced slump in car sales.

June's spending decline was the first since September 2003 and the biggest dip since September 2001. In contrast, consumer spending rose a solid 1 percent in May.

The June spending retreat comes on the heels of a report last week that the growth of gross domestic product slowed to a 3 percent annual rate in the second quarter, down from a 4.5 percent pace in the first three months of the year.

Employment also stalled in June as the economy added just 112,000 new jobs, a number far below the previous few months.

Most economists described the June slowdown as a temporary stall rather than the start of a new period of weakness. They noted that auto sales rebounded somewhat in July, suggesting that consumer spending figures for that month could show renewed growth.

In testimony before Congress last month, Federal Reserve Chairman Alan Greenspan acknowledged the softness but characterized it as more of a lull than a stall.

Richard Curtin, director of the University of Michigan's Consumer Confidence Survey, said his polling suggests that the June spending slump will turn out to be an anomaly.

"Consumers are not pessimistic or even anything close,'' said Curtin, whose surveys are used to create a widely followed index of consumer confidence. Curtin said the most recent figure was a solid 96.5, leading him to predict "spending should pick up later this year.''

Spending for autos and other big-ticket durable goods slumped 5.9 percent in June after rising 3.7 percent in May. Outlays for food, clothing and other nondurable goods fell 0.3 percent, an about-face from May, when spending in that category rose 1.4 percent.

The perennially anemic U.S. savings rate jumped to 2 percent, up from 1.2 percent the previous month.

Economist Kim Rupert, of the San Francisco consultancy Action Economics, blamed the June dip on soaring oil prices, which not only helped inhibit auto sales but robbed consumers of discretionary income.

"People had to cut back elsewhere because they were paying more at the pump,'' she said.

In the aftermath of Tuesday's spending disappointment, economists are looking ahead to Friday, when the Labor Department will release its jobs report for July.

The average prediction is that the economy created 225,000 new jobs in July, twice as many as in June.

Although economists will scrutinize Friday's report for further evidence of strength or weakness, Rupert said the jobs report is not expected to influence Federal Reserve officials who will meet on Tuesday to discuss interest rates.

Rupert said Fed officials have strongly hinted that they'll raise a key interest rate another quarter-percent next week and are unlikely to deviate from that expectation.

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