The Commerce Department said Friday that consumer spending was unchanged in May. Income growth edged up 0.2 per cent, but that was mostly because of gains from investments. Wages, the largest component of income, were essentially flat.
Americans cut back spending on cars and other long-lasting manufactured goods, even though they paid less for gas. Consumers did increase how much they spent on services for the second straight month, one of the few positive signs.
The government also said spending after adjusted for inflation was weaker in April and March than first thought.
Consumer spending drives roughly 70 per cent of economic activity. The mostly disappointing report suggests growth in the April-June quarter could be weaker than the previous quarter's modest 1.9 per cent annual pace.
Paul Dales, senior U.S. economist for Capital Economics, said annual growth in the second quarter could be closer to 1.5 per cent.
Job growth has tumbled in the past two months. Consumer confidence has fallen. And growth in manufacturing has slowed, in part because Europe's financial crisis has dampened demand for U.S. exports.
Some economists are hopeful that lower gas prices could lead consumers to spend more this summer.
"Looking ahead, the recent fall in gasoline prices will soon boost real consumption," said Dales. "But a sustained and significant acceleration in consumption growth cannot take place without faster jobs growth too."
Consumer spending on autos and other durable goods fell 0.4 per cent in May. Spending on non-durable goods dropped 0.8 per cent, mostly because of the lower gas prices.
The declines were offset by an increase in spending on services, which include everything from doctor's visits to rent payments. Service spending rose 0.3 per cent in May, the second straight increase.
Joel Naroff, chief economist for Naroff Economic Advisors, said the gains in spending on services are notable because services account for two-thirds of spending and nearly 45 per cent of economic activity.
Still, unless pay increases, consumers are likely to remain cautious about spending, he said.
"For people to get back into the malls and showrooms incomes will have to rise faster than we are seeing," Naroff said. "The big problem is wages, which are simply flat lining."
Even though wages didn't rise, Americans had more money to spend in May. After deducting taxes and adjusting for inflation, income rose 0.3 per cent — the biggest monthly increase for that category in two years. It largely reflected the sharp drop in gas prices that has lowered inflation.
Prices tied to consumer spending fell 0.2 per cent in May, the biggest drop since June 2010. Excluding volatile food and energy, prices were up a slight 0.1 per cent in May and have increased 1.8 per cent over the past 12 months. That's below the Fed's 2 per cent target for inflation, which gives the Fed more leeway to take steps to boost the economy.
The saving rate increased to 3.9 per cent of after-tax income in May. That's up from 3.7 per cent in April and the highest level since January.
Gas prices have fallen sharply since peaking in early April at a national average near $4 per gallon. The nationwide average for a gallon of regular was $3.37 (89 cents a litre) on Thursday, according to AAA's daily fuel gauge report.
If gas prices stay low, Americans will have more money to spend this summer on other goods, from autos and furniture to electronics and vacations, that fuel economic growth. Gasoline purchases tend to provide less benefit for the U.S. economy because some of the money goes to oil-exporting nations.
Consumer confidence fell in June for the fourth straight month, according to a closely watched survey from the Conference Board. Worries about the job market have outweighed the benefits of cheaper gas and a gradually improving housing market.
Employers added an average of only 73,000 jobs a month in April and May. The followed three months when the economy created an average 226,000 jobs a month.
The weak job market was a key reason the Federal Reserve last week downgraded its outlook for growth this year. It now expects growth of between 1.9 per cent and 2.4 per cent in 2012 — half a percentage point lower than its April forecast.Suggest a correction