Consumers spend more while incomes fall

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WASHINGTON (AP) — Americans earned less in August than in July, the first decline in nearly two years. With less income, consumers could cut back on spending and weaken an already-fragile economy.

Their lower pay explains why consumers increased spending at a slower pace in August. And most of the increase went to pay higher prices for food and gas. When adjusted for inflation, spending was flat.

Many people tapped their savings to cover the steeper costs. The savings rate fell to its lowest level since December 2009.

The decline in income offered “more evidence that households are in quite a bind,” said Paul Dales, senior U.S. economist at Capital Economics.

Consumer spending rose 0.2 percent in August, after growing 0.7 percent in July, the Commerce Department said Friday. Incomes fell 0.1 percent, which was the first decline since October 2009.

The data also contributed to a rough day of Wall Street. The Dow Jones industrial average tumbled to close 240 points down. Broader indexes also fell.

When people have less income, they spend less and that slows growth. Consumers spending accounts for 70 percent of economic activity.

The economy grew just 0.9 percent in the first half of the year, the worst six-month stretch since the recession officially ended more than two years ago.

Most economists have been predicting the second half of the year will be slightly better, in part because gas prices have come down since peaking this spring.

Dales estimates 2.5 percent growth in the July-September quarter and 1.5 percent in the final three months of the year. Those estimates take into account the weaker income figures.

Such growth may be enough to calm recession fears. But it is far from what is needed to lower the unemployment rate, which was 9.1 percent in August.

And Dales cautioned that he might have to lower his estimates even further if consumers have less money to spend.

“Households haven’t seen their incomes increase at all this year. That goes a long way to explain why consumption growth has been so weak,” Dales said. “Job growth is stagnant and even those people who do have a job are not in a position to spend because their incomes are not growing.”

Most people probably didn’t experience an actual pay cut last in August.

But the economy added no new jobs. And among those who were working, average hourly earnings dropped 3 cents and hours worked fell slightly. Those factors combined to lower wages and salaries.

Many retailers, particularly discounters like Target Corp. and Wal-Mart Stores Inc., have cut workers’ hours. They’re under pressure to trim expenses, said Burt Flickinger III, president of retail consultancy Strategic Resource Group, and labor is the biggest expense after inventory.

In June, Target had its first union election in two decades after facing allegations that it paid skimpy wages and reduced hours at a Valley Stream, N.Y. store. However, Target has repeatedly denied there was a companywide plan to reduce workers’ hours.

Advances in technology have also helped merchants optimize workers’ schedules, too. So they have more workers on duty during peak sales times without being overstaffed during lulls.

More efficient scheduling may make good business sense. But for workers, it can mean less money at time when the cost of living is increasing.

When factoring in the cost of inflation, after-tax incomes actually fell in both August and July. That represents the first back-to-back declines since mid-2008, at the height of the recession and financial crisis.

The bulk of August’s spending increase went to pay for non-durable items, such as gas, food and clothing — all of which have been affected by spikes in commodity prices this year.

On Friday, the average national price for a gallon of gas was $3.45. While that’s down from its peak of nearly $4 in May, it’s still nearly 76 cents more than what consumers paid a year ago.

At the same time, consumers spent less in August on big purchases, such as cars, appliances and furniture.

“Consumer spending is still rising, which is important for U.S. economic growth. But the gains are pretty mediocre,” said Jennifer Lee, senior economist at BMO Capital Markets.

Facing higher prices and earning less money, consumers saved only 4.5 percent in August. The savings rate rose as high as 6.5 percent in late 2008, at the height of the recession and financial crisis.

Prior to the recession, an abundance of jobs and inflated home prices made many feel wealthier. They saved just 2 percent back of their income back then.

“The American consumer is in a fragile state — high debt, low wage growth, poor employment prospects and increasing prices,” said Chris G. Christopher, senior economist at IHS Global Insight.


AP Business Writer Anne D’Innocenzio contributed from New York to this report.