WASHINGTON - Americans earned less last month, the first decline in nearly two years. With less income, consumers could cut back on spending and weaken an already-fragile economy.
Consumers spent a little more in August despite seeing their incomes drop 0.1 per cent, the Commerce Department said Friday. Consumer spending rose just 0.2 per cent, after a more robust 0.7 per cent gain in July.
Many tapped savings to cover the steeper costs. And most of the increase in spending went to pay higher prices for food and gas. When adjusted for inflation, August consumer spending was flat.
Stocks fell after the report's release. The Dow Jones industrial average fell more than 100 points in the first half-hour of trading.
The data offered "more evidence that households are in quite a bind," said Paul Dales, senior U.S. economist at Capital Economics.
In August, employers added no new jobs and cut hourly earnings for the first time in more than three years.
Income growth has been sluggish for most of the year. After taking inflation into account, after-tax incomes actually fell 0.3 per cent in August and 0.2 per cent in July. That's the first back-to-back declines in inflation-adjusted incomes since mid-2008, when the country was in the midst of the recession and financial crisis.
Even the increase in spending wasn't necessarily a good sign. Consumers spent 0.3 per cent more on nondurable goods, such as food and clothing.
Gasoline prices are now roughly $3.46 per gallon. While that is higher than last year, the price is down nearly 52 cents from this year's peak price of $3.98.
Consumers spent less last month on big purchases, such as cars, appliances and furniture. Car sales fell during the month, but part of that weakness reflected supply problems stemming from the Japan crisis.
"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 per cent last month. The savings rate rose as high as 6.5 per cent in late 2008, at the height of the recession and financial crisis.
Prior to the recession, Americans saved just 2 per cent. An abundance of jobs and inflated home prices made many resist stowing money away.
The economy grew at an annual rate of just 0.9 per cent in the first six months of the year, the slowest growth since the recession officially ended more than two years ago.
Economists expect only slightly better growth in the second half of this year. But that's based on expectations that consumers will spend more.
Some are predicting growth of around 2 per cent in the second half of the year. That level of growth would ease recession fears, but it's not enough to lower the unemployment rate, which was 9.2 per cent in August.
Consumer confidence stayed weak in September after the economy experienced a number of shocks this summer. Lawmakers fought over raising the nation's borrowing limit, Standard & Poor's downgraded long-term U.S. debt, the stock market fluctuated wildly and Europe's debt crisis intensified.
The Federal Reserve last week agreed to shift $400 billion of its portfolio of Treasury securities to try to drive down long-term interest rates. It was the Fed's latest unconventional move seeking to give the economy a boost.