Consumer Spending Down Sharply in June

U.S. consumer spending (search) took a much deeper dive than expected in June as shoppers cut back on purchases of expensive items like autos amid slowing income growth, a government report showed on Tuesday.

Personal spending dropped 0.7 percent in June after climbing 1 percent in May, the Commerce Department (search) said. Adjusted for inflation (search), spending plunged 0.9 percent.

Incomes rose a tepid 0.2 percent, a slowdown from May's 0.6 percent gain.

Wall Street economists had forecast a 0.1 percent drop in spending with income up 0.2 percent, and many have expressed confidence the soft spot for spending has already been left behind.

Coupled with inflation and taxes, the meager income gain in June 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 rose just 0.1 percent, the weakest reading since December.

In figures released on Friday that incorporated Tuesday's data, the department had said consumer spending advanced 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. Economists think auto sales rebounded smartly last month.

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

The 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. Core inflation (search), which strips out volatile food and energy costs, rose a scant 0.1 percent for the second month in a row.

Federal Reserve (search) 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 a rate-rise campaign they kicked off a little over a month ago.

Officials have said the campaign should be able to move forward at a "measured" pace — language markets generally view as signaling a steady diet of quarter-point moves — as long as inflationary pressures are subdued.