Consumer spending and incomes were flat in June while home purchase contracts tumbled to a record low, implying an anemic economic recovery for the remainder of this year.
The reports on Tuesday showed the recovery assumed a decisively sluggish tone in the last month of the second quarter, setting up the July-September period for a lackluster performance just as lawmakers hit the hustings before November elections.
Analysts said there was now a greater risk that the April-June quarter's already soft 2.4 percent growth pace could be revised down when the government publishes its second estimate for gross domestic product later this month.
The data confirm the growth momentum doesn't look good, said Bill Cheney, chief economist at John Hancock Financial Services in Boston. We originally expected the second quarter to be quite strong and then estimates kept coming down and now it looks like it will probably be revised even further down.
Spending had edged up 0.1 percent in May, the Commerce Department said, and analysts expected another rise in June.
A separate report from the National Association of Realtors showed the group's Pending Home Sales Index, based on contracts to buy previously owned homes signed in June, dropped 2.6 percent to a historic low of 75.7. Markets had expected the index to rise 0.6 percent.
The weak data and below-forecast earnings from household products maker Procter & Gamble Co and Dow Chemical weighed on U.S. stocks. All three main indices ended down after rallying the previous day. The spending report also hit retailers' stocks, with the Standard & Poor's retailing index sliding 1.9 percent.
Prices of safe-haven U.S. government bonds rose, pushing the yield on the two-year Treasury note to an all-time low. Bond yields move inversely to prices. The U.S. dollar fell to multi-month lows against the euro, yen and the British pound.
ECONOMY IN A FUNK
Federal Reserve Chairman Ben Bernanke said on Monday consumer spending should pick up in coming quarters as income rises and credit conditions improve, helping to sustain the recovery.
But the sluggish pace of economic growth threatens to keep unemployment high for months, posing trouble for Democrats hoping to retain their congressional majorities and potentially undercutting the income growth Bernanke is hoping to see.
Treasury Secretary Timothy Geithner on Tuesday warned that the unemployment rate, which stood at a lofty 9.5 percent in June, could rise for a couple of months before subsiding.
But what we expect to see ... is an economy that's gradually healing, he said on ABC television.
The government is expected to report on Friday that non-farm payrolls fell by 65,000 in July after declining by 125,000 in June as temporary workers hired to conduct the decennial census were let go. Private-sector payrolls are seen rising a modest 90,000 and the unemployment rate is expected to climb to 9.6 percent.
At its meeting on Tuesday, the Fed's policy-setting committee will debate whether further steps are needed to bolster the economy.
Against the backdrop of poor household finances, auto sales ticked up in July, but were likely to fall short of more optimistic forecasts of analysts that would have made the month the strongest since last August.
NO HOUSING SALVATION
The decline in contracts to buy existing homes suggested sales will probably fall again in July as the market tries to adjust to the end of a popular homebuyer tax credit.
High unemployment, low confidence and tight credit will mean that the bounce back (in home sales) will be fairly modest, said Paul Dales, U.S. economist at Capital Economics in Toronto. In other words, the housing market will not be able to pull the wider economy out of its current funk.
The Commerce Department also reported that new orders received by U.S. factories dropped 1.2 percent in June, a steeper drop than markets expected.
Manufacturing has been leading the economy's recovery, but the sector has displayed signs of exhaustion. Data on Monday showed factory activity slowed in July for a third straight month amid a pullback in orders.
The weak factory orders report supported views the government would lower its initial second quarter GDP estimate.
Second quarter growth is now looking especially soft. On the brighter side, the prospect of a big inventory overhang weighing on third-quarter production -- which loomed large in the initial estimate -- now appears less threatening, said Michael Feroli, an economist at JPMorgan in New York.
In June, consumer spending adjusted for inflation rose 0.1 percent after gaining 0.2 percent in May.
Personal income was flat after increasing 0.3 percent in May. It was the first time since September that incomes had not risen.
Real disposable income increased 0.2 percent after rising 0.4 percent the prior month. The saving rate rose to 6.4 percent, the highest since June last year.
The report also showed the personal consumption expenditures price index, excluding food and energy -- a key inflation measure monitored by the Fed -- rose 1.4 percent in the 12 months to June, the slowest increase since September.
(Additional reporting by Tabassum Zakaria and Corbett Daly; Editing by Eric Walsh)