05/31/2013 08:38 EDT | Updated 07/31/2013 05:12 EDT

US consumers cut spending 0.2 per cent in April after income fails to grow

WASHINGTON - Americans cut back on spending in April after their income failed to grow, a sign that economic growth may be slowing.

The Commerce Department said Friday that consumer spending dropped a seasonally adjusted 0.2 per cent in April, the first decline since last May. That follows a 0.1 per cent increase in March and a 0.8 per cent jump in February.

A drop in gas prices likely lowered overall spending. Adjusted for inflation, spending ticked up 0.1 per cent last month. Still, that was the smallest gain since October.

Consumers also likely spent less to heat their homes last month, which may have reduced spending on utilities. April's weather was mild after an unusually cold March.

Income was unchanged last month, after a 0.3 per cent rise in March and 1.2 per cent gain in February. Wages and salaries barely grew, while government benefit payments fell.

The retrenchment in spending suggests consumers may be starting to feel the impact of higher taxes.

An increase in Social Security taxes this year has reduced take-home pay for nearly all consumers who draw a paycheque. A person earning $50,000 a year has about $1,000 less to spend this year. A household with two high-paid workers has up to $4,500 less.

Income taxes on the wealthiest Americans also increased.

Consumer spending drives 70 per cent of economic activity. It grew at the fastest pace in more than two years from January through March, helping the economy expand at a 2.4 annual rate during that quarter.

Economists said the latest spending figures suggest growth may be slowing in the April-June quarter to around a 2 per cent rate. But most still expect growth to improve slightly after that as the impact of tax hikes and government spending cuts fades.

"Overall, a sobering report for those expecting ... growth to accelerate sharply," said Paul Ashworth, chief U.S. economist at Capital Economics. "There will be some modest pickup in the second half of the year, as the fiscal drag starts to ease, but we expect the improvement to be very gradual rather than dramatic."

Slower growth could lead the Federal Reserve to delay any scaling back in its bond purchases, which are keeping borrowing costs low.

Investors had been speculating that the Fed would start to slow its purchases in the next few months. That's led to a spike in Treasury yields and higher interest rates.

Low inflation could also lead the Fed to continue its bond purchases.

The Fed's preferred inflation gauge, which is updated as part of the consumer spending report, showed that prices fell 0.3 per cent in April and increased just 0.7 per cent in the past 12 months.

Still, economists say the Fed's stimulus is most tied to the health of the job market, which has improved in recent months.

Employers have added an average of 208,000 jobs a month since November. That's well above the monthly average of 138,000 during the previous six months.

Greater hiring is among several trends that could partly offset the impact of the tax increases and revive spending later this year.

Consumer confidence surged in April to a five-year high, according to the Conference Board, as Americans' outlook on the job market improved.

Home prices have surged 11 per cent over the past year. Rising home tend to make homeowners feel wealthier and more likely to shop. Some economists estimate that for every dollar increase in home values, consumer spending can rise as much as 10 cents.


Follow Chris Rugaber on Twitter at