Spending in June stagnates despite lower gas prices

August 2, 2011

Consumers pocketed the cash they saved from lower gas prices in June rather than spending it, according to government data released Tuesday, raising worries about the health of the economic recovery.

The Commerce Department reported that consumer spending remained stagnant in June and helped tamp down growth during the second quarter to a tepid 1.3 percent, below expectations . Meanwhile, income growth budged by a mere 0.1 percent, constrained by the tight job market.

“Consumers were not in the spending mood when the quarter began, and they weren’t a spending mood when the quarter ended,” said Stuart Hoffman, chief economist for the PNC Financial Services Group. “It was just a flat line.”

Economists had blamed fuel costs for eating away at household budgets and curtailing the impact of stimulus programs such as the payroll tax cut during the first quarter. But June’s data showed that Americans are unwilling to open their wallets even after gas prices moderate. Fuel prices retreated roughly 10 percent in June from a high of $3.91 for a gallon of regular conventional gas the previous month.

Purchases of durable goods such as home appliances and jewelry dropped 0.6 percentage points in June, driven by a falloff in automobile sales. Part of the decline may be attributed to disruptions in supply after the disasters in Japan, but it also reflects the broader struggles of the auto industry. Toyota reported Tuesday that sales in most categories were down by double digits for the year through July. Honda also posted a 28 percentage point drop for the month.

But the Big Three U.S. automakers reported more promising results. Chrysler said its sales were up 20 percent, while Ford jumped almost 9 percent. Sales at General Motors rose 7.6 percent.

Some economists said consumer confidence may get a boost from the last-minute deal brokered in Congress to raise the federal debt ceiling and avoid default on the government’s bills, but the effect is likely to wear off quickly. A recent Gallup poll found that nearly three-quarters of Americans thought the economy was getting worse as lawmakers debated the deficit — the worst reading since March 2009.

Tuesday’s data also show consumers rebuilding their savings to 5.4 percent of disposable income in June, up from 5 percent the previous month. Higher savings coupled with anemic wage and spending growth have tempered hopes for a rebound during the second half of the year.

“We’re starting in a bit of a hole,” Wells Fargo senior economist Mark Vitner said. “Expectations for growth were too strong for 2011 and probably for 2012.”

Vitner forecast that the nation’s gross domestic product was likely to increase 2 to 2.5 percent for several years. Though that estimate is significantly below the Federal Reserve’s prediction of 3.4 to 3.9 percent growth for the year, Vitner said it is enough to keep the economy treading water.


“It’s a good ways away from a recession,” he said.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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