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Americans cut spending for first time in 20 months

WASHINGTON — Americans cut back on their spending in June for the first time in nearly two years and their incomes grew by the smallest amount in nine months, a troubling sign for an economy that is barely growing.

Consumer spending dropped 0.2 percent in June, the Commerce Department said Tuesday. Some of the decline was caused by declining food and energy prices, which had spiked in recent months. When excluding spending on those items, consumer spending was flat.

Incomes rose 0.1 percent, the weakest growth since September. Many people are responding by saving more. The personal savings rate rose to 5.4 percent of after-tax incomes, the highest level since August 2010.

The data confirmed last week’s report that showed the U.S. economy expanded at a tepid annual rate of 1.3 percent in the spring after only 0.4 percent growth in the first three months of the year. But it also highlighted that consumer spending weakened during the April-June quarter, which could mean the sluggish economy is worsening.

Stock futures were trading lower after the report was released.

“The recent run of weak economic news has made us more concerned that any rebound will be more modest than previously looked likely,” said Paul Dales, senior U.S. economist at Capital Economics.

High gas prices and unemployment have squeezed household budgets this spring. Many Americans are cutting back on purchases of cars, furniture, appliances and electronics. Consumer spending is closely watched because it accounts for 70 percent of economic activity.

Biggest drop in non-durable goods

Employers have responded by reducing hiring. The economy added just 18,000 net jobs in June, the fewest in nine months. The unemployment rate rose to 9.2 percent, the highest level this year.

The government issues its July employment report on Friday.

The biggest drop in spending occurred in such items as food and gasoline. Spending on such non-durable goods fell 5.5 percent, reflecting price declines after spikes early this year. An inflation gauge tied to consumer spending dropped 0.2 percent in June, the biggest one-month decline since September 2009. Outside of food and energy, prices were up 0.1 percent.

Still, spending on durable goods, such as autos, also fell in June 1.1 percent. One reason for the decline may be the shortage of popular car models in showrooms. Supply chain disruptions caused by the March earthquake in Japan have limited production of auto and electronic parts.

Many analysts are still hopeful that growth will rebound in the second half of the year. They expect auto production and sales to pick up once supply chain disruptions ease.

Economic forecasts trimmed

But the turnaround may not come for a while. Manufacturers had their weakest growth in two years in July, according to the Institute for Supply Management.

The private trade group of purchasing executives said that its index of manufacturing activity fell to 50.9 percent in July from 55.3 percent in June. The reading was the lowest since July 2009 — one month after the recession officially ended.

And gas prices remain high, even after coming down from their peak of nearly $4 a gallon (3.8 liters) in early May. The average price for a gallon was $3.70 on Tuesday — 14 cents higher than a month ago and almost a dollar more than the same month last year.

Some economists have begun to trim their forecasts for the second half of the year. Dales and his colleagues at Capital Economics have cut their outlook for second half growth to 2 percent, down from a previous forecast of 2.5 percent growth in the second half of this year.