Spending is closely watched because it accounts for 70 percent of economic activity. Even with the weakness in June, spending for the April-June quarter revived, helping to lift overall economic growth to a solid rate of 2.6 percent during the quarter. Economists believe solid job growth will keep economic growth at healthy levels this quarter.
Andrew Hunter, a U.S. economist with Capital Economics, said that the new report showed that consumer spending had lost some momentum at the end of the second quarter "which isn't a particularly promising sign going into the third quarter."
The slowdown in income growth reflected declines in dividend and interest payments and other investment income. The key category of wages and salaries actually rose a solid 0.4 percent in June, reflecting strong employment growth during the month.
An inflation gauge tied to consumer spending that is closely followed by the Federal Reserve was up 1.4 percent for the 12 months ending in June, compared to a 1.5 percent increase in May. It was the smallest 12-month gain since last September and showed that inflation is continuing to fall farther from the Fed's target for prices to be rising by 2 percent annually.
The central bank left its key interest rate unchanged at a meeting last week after boosting the rate in March and June. Some economists believe the Fed will not raise the rate again this year unless inflation resumes rising toward the Fed's 2 percent target.
Many economists believe the slowdown in inflation will keep the Fed on hold at its next meeting in September. But Hunter said he still expected one more rate hike in 2017, probably in December, prompted by further declines in the unemployment rate, which already stands at a low 4.4 percent.
With incomes flat and spending showing a tiny gain, saving slipped to 3.8 percent of after-tax income, down from 3.9 percent in May. The 2.6 percent in overall growth, as measured by the gross domestic product, in the second quarter was more than double the lackluster 1.2 percent gain in the first quarter.
President Donald Trump has vowed that his economic program of tax cuts, deregulation and tougher trade enforcement will lift growth to 3 percent or better. At a Cabinet meeting Monday, Trump took note of the 2.6 percent GDP gain in the second quarter, calling it "an unbelievable number." He said, "2.6 is a number that nobody thought they'd see for a long period of time."