Many economists viewed the June figures as an aberration, and said both the economy and the Fed will likely stay on track. One key sign of strength will come Friday when the Labor Department releases the July employment report.
Much of the June drop in consumer spending reflected a severe falloff in auto sales that occurred when shoppers shunned manufacturers' efforts to trim rebates and other financial incentives. Spending on such big-ticket durable goods declined 5.9 percent in June, Commerce said.
U.S. automakers cranked up incentives in July, and sales popped back up, they reported yesterday, providing support for the optimists' economic outlook.
"We expect the economy to register moderate growth in the second half of 2004," Joe Liro, an economist with Stone & McCarthy Research Associates, wrote in a note to clients yesterday. "The solid outlook for economic growth and the quickened rate of inflation will cause the Fed to continue to increase the [rate target] at next week's [Fed] meeting."
While autos accounted for most of the slump in durable goods spending, spending on other goods also fell in June, by 0.3 percent, while spending on services rose by 0.2 percent.
"We knew consumer spending hit a bump in the road during June but we had no idea the pothole would be so huge," Liro wrote.
The Commerce report showed that auto pricing was not entirely to blame for the consumer pullback. Other big factors were weak income growth and higher inflation.
Overall personal income -- which includes wages, salaries, and income from dividends, interest, self-employment and other sources -- rose by 0.2 percent in June, the slowest monthly increase in more than a year, Commerce reported.
Consumer prices rose 0.2 percent in June, and 2.5 percent in the 12 months that ended in June, according to a Commerce Department inflation measure.
Gasoline prices spiked in late May to a national average of $2.054 for a gallon of unleaded regular, taking a bite out of household budgets in June. They fell a bit in June and July, to an average of $1.89 per gallon yesterday, according to the AAA automobile club.
Many of the forecasts for healthy economic growth in the second half of this year assume that oil prices will fall from their spring highs, which largely reflected fears of terrorism and other potential supply disruptions.
But crude oil prices have jumped to new highs in recent days on similar worries. Benchmark crude scheduled for September delivery rose to $44.15 on the New York Mercantile Exchange yesterday, the highest price since trading began there in 1983, Bloomberg News reported.
Inflation remained tame in June after excluding volatile food and energy prices. The Commerce Department's so-called core measure showed consumer prices rising 0.1 percent in June, and 1.5 percent in the 12 months that ended in June.
The 12-month increase has averaged 1.5 percent since February, indicating that core inflation has stabilized at a level that is well within the Fed's comfort range, but it is up from a low of 1 percent in September.
