Americans cut back spending in April

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Americans cut back on spending in April after their income failed to grow, a sign economic growth may be slowing.
    
The Commerce Department said Friday that consumer spending dropped a seasonally adjusted 0.2 percent in April, the first decline since last May. That follows a 0.1 percent increase in March and a 0.8 percent jump in February.

A drop in gas prices likely lowered overall spending. Adjusted for inflation, spending ticked up 0.1 percent last month. Still, that was the smallest gain since October.

Income was unchanged last month, after a 0.3 percent rise in March and 1.2 percent gain in February. Wages and salaries barely grew, while government benefit payments fell.

The retrenchment in spending suggests consumers may be starting to feel the impact of higher taxes.

An increase in Social Security taxes this year has reduced take-home pay for nearly all consumers who draw a paycheck. A person earning $50,000 a year has about $1,000 less to spend this year. A household with two high-paid workers has up to $4,500 less.

Income taxes on the wealthiest Americans also increased.

Consumer spending drives 70 percent of economic activity. It grew at the fastest pace in more than two years from January through March, helping the economy expand at a 2.4 annual rate during that quarter.

Economists said the latest spending figures suggest growth may be slowing in the April-June quarter to around a 2 percent rate. But most still expect growth to improve slightly after that as the impact of tax hikes and government spending cuts fades.

"Overall, a sobering report for those expecting ... growth to accelerate sharply," said Paul Ashworth, chief U.S. economist at Capital Economics. "There will be some modest pickup in the second half of the year, as the fiscal drag starts to ease, but we expect the improvement to be very gradual rather than dramatic."

Slower growth could lead the Federal Reserve to delay any scaling back in its bond purchases, which are keeping borrowing costs low.

Investors had been speculating that the Fed would start to slow its purchases in the next few months. That's led to a spike in Treasury yields and higher interest rates.

Still, economists say the Fed's stimulus is more tied to the health of the job market, which has improved in recent months.

Employers have added an average of 208,000 jobs a month since November. That's well above the monthly average of 138,000 during the previous six months.

A decline in gas prices may have played a part in reducing spending in April. The figures aren't adjusted for inflation. Gas prices tumbled in March and April after peaking in late February.

Greater hiring, rising home prices and strong stock market gains could help offset the impact of the tax increases and revive spending later this year.

Home prices have surged 11 percent over the past year. Rising home tend to make homeowners feel wealthier and more likely to shop. Some economists estimate that for every dollar increase in home values, consumer spending can rise as much as 10 cents.

With contributions by Ed Joyce

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