Americans spend at weakest pace in 20 months

When adjusted for inflation, spending actually dropped 0.1 percent in May

Published June 27, 2011 1:03PM (EDT)

In this June 21, 2011, photo, Shell gas worker Toke Fusi lowers gas prices at a Shell gas station in Menlo Park, Calif. (AP Photo/Paul Sakuma)
In this June 21, 2011, photo, Shell gas worker Toke Fusi lowers gas prices at a Shell gas station in Menlo Park, Calif. (AP Photo/Paul Sakuma)

Americans spent at the weakest pace in 20 months, a sign that gas prices are taking a toll on the economy.

Consumer spending was unchanged in May, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1 percent.

April's consumer spending figures were revised to show a similar decline when adjusting for inflation. That marked the first declines in inflation-adjusted spending since January 2010.

Incomes rose 0.3 percent for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1 percent in May, after falling by the same amount in the previous month. By that measure, incomes have been essentially flat since the beginning of the year.

Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May, the lowest amount in eight months. That followed three months in which employers hired an average of 220,000 net new workers each month. The unemployment rate rose to 9.1 percent last month.

Fewer jobs and high unemployment leave workers with little leverage to ask for raises.

Slow wage growth hurts the broader economy because consumers have less money to spend. Consumer spending accounts for 70 percent of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.

The economy expanded at an annual rate of 1.9 percent in the January-March period. Many economists believe that growth is only slightly better in the current April-June period.

An Associated Press survey of 38 top economists predicts that rate will be about 2.3 percent. Economists are optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace. They note that two of the biggest factors slowing the economy are abating.

Gas prices have eased since peaking in early May at a national average of nearly $4 a gallon. In the past two months they have dropped to a national average of $3.60 per gallon, according to AAA's daily fuel gauge.

And U.S. factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami in that country has led to a parts shortage, particularly for auto and electronics manufacturers.

Still, growth must be stronger to significantly lower the unemployment rate, which was 9.1 percent last month. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

By Christopher S. Rugaber

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U.s. Economy