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Americans cut spending for first time in 20 months

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WASHINGTON (AP) — 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.

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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.

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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.

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The data confirmed last week’s report that showed the 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.

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Stock futures were trading lower after the report was

released.

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“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, .

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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.

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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.

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The government issues its July employment report on

Friday.

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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.

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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.

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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.

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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.

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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.

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And gas prices remain high, even after coming down from their peak

of nearly $4 a gallon 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.

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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.

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