Incomes fell for the first time in nearly two years in August and consumers dug into their savings to keep spending, according to a government report that showed the impact of the weak jobs market.
The Commerce Department said on Friday spending rose 0.2 percent, in line with economists' expectations, after increasing 0.7 percent in July. When adjusted for inflation, however, spending was unchanged after rising 0.4 percent in July.
Consumer spending accounts for about 70 percent of U.S. economic activity, so the flat inflation-adjusted reading adds to a picture of shaky GDP growth.
Income slipped 0.1 percent, the first decline since October 2009 and contrasted with economists' forecast for a 0.1 percent advance. Private wages and salaries dropped $12.2 billion after increasing $23.8 billion in July.
What you're basically getting is a scene where consumers are losing momentum, they're losing momentum on income and as a result of that they're slowing down on spending, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities in New York.
Employment growth ground to a halt in August, and the jobless rate remains at a lofty 9.1 percent, eroding consumers' buying power. The September payrolls report is due next Friday.
U.S. stocks opened lower after the data, while bond prices soared, pushing the 30-year yield down to 2.93 percent. A deepening gloom is taking hold in financial markets as investors worry that with no quick end to the euro-zone crisis in sight, the global economic slowdown will worsen.
Manufacturers are retrenching. Industrial conglomerate Ingersoll Rand Plc was the latest, cutting its third-quarter and full-year earnings forecast to below market estimates, citing weak demand at its key North American residential and commercial markets for security technology.
The Chicago PMI manufacturing index and Thomson Reuters/University of Michigan consumer sentiment survey due later on Friday will give a further reading on the U.S. outlook.
Consumer spending growth slowed sharply to a 0.7 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.
Overall economic growth rose at a 1.3 percent rate in the second quarter after expanding only 0.4 percent in the January-March period.
Last month, real spending on goods fell 0.2 percent, while services ticked up 0.1 percent.
Disposable income was unchanged for the first time since September, but when adjusted for inflation fell 0.3 percent, the largest drop since October 2009.
With real disposable income weak, savings fell to an annual rate of $519.3 billion, the smallest since December 2009, from $550.5 billion in July. The savings rate dropped to 4.5 percent, also the lowest since December 2009.
The report showed a moderation in inflation pressures on a monthly basis. The personal consumption expenditures price (PCE) index rose 0.2 percent after increasing 0.4 percent in July.
Compared to August last year, the index was up 2.9 percent, the largest increase since October 2008, after advancing 2.8 percent in July.
The core PCE index -- excluding food and energy - rose 0.1 percent after gaining 0.2 percent the prior month.
The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through August after rising by the same margin in July.
The Fed would like to see it close to 2 percent.
(Reporting by Lucia Mutikani; Additional reporting by Emily Flitter in New York; Editing by Andrea Ricci)