By Eric Morath
WASHINGTON--Constrained American consumers are threatening to
weigh on U.S. growth just after the economy regained its footing
following a pullback early in the year.
Hamstrung by weak income gains, consumers are struggling to step
up spending. That is providing perhaps the biggest challenge to a
second-half economic breakout that already is at risk due to global
unrest and persistent slack in the labor market.
Household spending declined a seasonally adjusted 0.1% in July
from a month earlier, the Commerce Department said Friday. It was
the first time spending fell in a month since January. Meanwhile,
personal income, reflecting income from wages, investment, and
government aid, rose 0.2% in July--the smallest monthly increase
this year.
"On the income side, we're still lagging a bit, so consumers are
having a hard time getting out of second gear," said Jim Baird,
chief investment officer at Plante Moran Financial Advisors.
Consumer spending is the lifeblood of the U.S. economy,
accounting for more than two-thirds of economic output.
Outlays slowed sharply to start the year during an unusually
cold winter in much of the country. That contributed to gross
domestic product contracting at a 2.1% annual pace during the first
quarter. Household spending and the broader economy bounced back in
the second quarter when GDP advanced at a 4.2% pace, the Commerce
Department reported Thursday.
The latest numbers suggest growth could settle closer to a pace
that is little better than the 2% gains averaged since the recovery
began five years ago. Forecasting firm Macroeconomic Advisers on
Friday cut its projection for third-quarter growth to a 2.6% annual
pace from 3.1%. Barclays lowered its forecast by half a percentage
point to a 2.2% pace.
Nashville-based home décor retailer Kirkland's Inc. has recorded
sales growth so far this year, but Chief Executive Robert Alderson
remains concerned about inconsistent shopping habits in what he
called a "no or slow growth economy."
"We would still prefer a better jobs environment and a housing
market to feel more comfortable with the state of the consumer," he
told analysts last week. "Sustained economic optimism and
predictable growth are required to produce both."
July's spending pullback was broad-based. Outlays fell on both
durable goods, such as cars and appliances, and everyday items,
including gasoline and groceries. Services spending was flat,
though that could reflect a cooler-than-normal summer that kept
utility bills in check.
On the surface, the weak spending figures appear at odds with
accelerating job creation. The last six months saw the strongest
stretch of payroll gains since 2006. Underpinning those gains,
however, was hiring in low-wage fields such as restaurants,
retailers and temporary jobs. At the same time, a historically high
number of Americans aren't participating in the labor force or are
working part time but would prefer a full-time job.
The feelings of consumers have improved of late. Consumer
sentiment increased in August from July, according to a separate
Reuters/University of Michigan gauge released Friday. That gain was
driven by higher-income Americans. Households with incomes less
than $75,000 are feeling more pessimistic.
"Higher wages have been slow to appear and gains in the stock
market are not enjoyed by all," said Chris Christopher, an IHS
Global Insight economist. "More widespread income gains are needed
to get all consumers back on solid footing."
From a year earlier, incomes grew 4.3% in July without adjusting
for inflation, a modest acceleration from the start of the year.
Still, income gains remain below the annual average increase of
about 6% seen during the past 35 years.
"I don't know that the confidence level is there yet for workers
to leave a job for a higher salary or ask for a raise," said Navy
Federal Credit Union economist Alan MacEachin.
The unemployment rate, at 6.2% in July, is down more than a
percentage point from a year earlier. The rate might need to fall a
half-percentage point further to put much upward pressure on wages,
Mr. MacEachin said.
Write to Eric Morath at eric.morath@wsj.com