Consumer spending was sluggish in June

updated 2:40 p.m. ET Aug. 1, 2006

WASHINGTON - Consumer spending was weak for a fourth straight month in June as rising gasoline prices left Americans with little to spend on other items. Construction activity posted a stronger-than-expected advance, though, as a record level of government spending helped offset weakness in housing.

The Commerce Department reported that consumer spending rose by 0.4 percent in June, down from a gain of 0.6 percent in May. After adjusting for inflation, the gain was an even weaker 0.2 percent, the fourth straight month of a spending increase of 0.2 percent or less.

Meanwhile, construction spending rose by 0.3 percent in June to a record $1.22 trillion at a seasonally adjusted annual rate. The strength came from big gains in government construction and commercial building activity. Housing construction fell for a third straight month.

In a third report, the Institute for Supply Management said that its closely watched gauge of manufacturing activity posted a reading of 54.7 in July. That was a better-than-expected showing and followed a reading of 53.8 in June.

In the spenidng report, income growth rose a solid 0.6 percent in June, following a 0.4 percent increase in May. A measure of inflation closely watched by the Federal Reserve rose by 0.2 percent in June and was up 2.4 percent over the past year, the biggest gain in 11 years.

The 0.3 percent rise in construction spending was stronger than the 0.1 percent advance analysts had forecast. The strength came from a 0.8 percent rise in government construction activity, reflecting a 0.9 percent increase in state and local building projects which rose to a record $255.3 billion at an annual rate. That offset a 0.7 percent drop in federal construction spending which fell to a rate of $17.2 billion.

However, economists still expect construction activity to weaken in coming months, reflecting a slowdown in housing. For June, housing construction dropped by 1 percent as builders struggled to deal with a backlog of unsold homes, reflecting this year’s jump in mortgage rates.

Consumer spending accounts for two-thirds of total economic growth and the slowdown in this area was a big factor in the slowing of the overall economy in the spring to a growth rate of just 2.5 percent, less than half the 5.6 percent pace of the first quarter.

The healthy jump in incomes and the sluggish rise in spending were both in line with Wall Street expectations.

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