Americans' income growth effectively stalled in June, and consumer spending plunged at the steepest monthly rate since September 2001, the government reported yesterday, fueling new concerns about the strength of the U.S. economic expansion.
Overall personal income was flat in June after adjusting for inflation and taxes, the Commerce Department said. Wages and salaries, the largest component of personal income, did not budge in June, even without such adjustments -- the worst showing since they dropped 0.1 percent in December.
Consumer spending dropped 0.7 percent in June, according to the Commerce report, reinforcing other signs that the U.S. economic expansion lost momentum in the spring with rising inflation, higher interest rates and a slowing pace of job creation.
The report comes as President Bush and Sen. John F. Kerry (Mass.), the Democratic presidential nominee, continue to spar over the effectiveness of the administration's economic policies. A series of tax cuts and Federal Reserve interest rate cuts helped boost economic growth for much of the past three years, but many analysts had expected stronger employment growth and income gains to fuel a more vibrant recovery by now.
The June results "raise increasingly serious questions about the strength and sustainability of the economy in the months ahead," said Charles W. McMillion, president and chief economist of MBG Information Services.
Stock prices fell and bond prices rose yesterday as many investors concluded that the economy may continue to cool, which would both mute profit growth and ease inflation pressures.
Many economists yesterday held to their forecasts that Fed policymakers will raise their short-term interest rate target to 1.50 percent from 1.25 percent when they meet next week, to keep inflation under control.
But some said Fed officials might reconsider whether to leave rates unchanged until it becomes clear whether June marked an economic hiccup or the beginning of a more worrisome slide.
Fed Chairman Alan Greenspan said last month on Capitol Hill that the economy had a hit a temporary "soft patch," but that it should not hinder an expansion that appeared to be broadening and gaining momentum. And he signaled that the Fed would likely raise rates gradually to keep inflation under control.
"This soft patch . . . now appears to be deeper and wider than anyone had any reason to suspect a few months ago," McMillion said. "I think the Federal Reserve should be re-evaluating planned moves."
