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Pricey gas hits US consumers, weighs on growth

WASHINGTON -- U.S. households stretched to pay for costlier gasoline on meager income growth in August, undercutting spending on other items and pointing to lackluster economic growth.

Other data on Friday showed factory activity in the Midwest contracted this month for the first time in three years.

The Commerce Department said consumer spending rose 0.5 percent last month after gaining 0.4 percent in July. The increase was the largest in six months, but it reflected a rise in gasoline costs that pushed inflation up by the most in nearly 1-1/2 years.

Adjusting for the jump in prices, spending edged up a scant 0.1 percent. With inflation wiping out their buying power, consumers curbed their saving to fund purchases — a potentially bad omen for future spending.

“Consumers are supporting the recovery, but they are just not able to lead it because of the soft jobs market and little income. They are running low on fire power,” said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Income ticked up 0.1 percent but was down 0.3 percent after accounting for inflation and taxes. It was the first decline in real disposable income since November.

Factory Losing Steam

Separately, the Institute for Supply Management-Chicago said its Midwest factory barometer found activity contracted in August for the first time since September 2009, reflecting weak new orders and a slowdown in hiring.

It was consistent with other recent reports flagging a cooling in manufacturing, a sector that had been the pillar of the economy's recovery.

“To the extent that the moderation in manufacturing activity is reflecting weakening domestic and global demand, it may be a harbinger of continued sub-par GDP growth,” said Millan Mulraine, a senior economist at TD Securities in New York.

But households appear little perturbed by the gathering dark clouds. Consumer confidence touched a four-month high in September, boosted by higher stock market prices and gains in home values. That resilience could be a boost to President Barack Obama as he seeks a second term in November.

Economists, however, cautioned that household morale could sour toward the end of the year if the U.S. Congress fails to avoid the so-called fiscal cliff — US$600 billion or so in expiring tax cuts and government spending reductions set to take hold in 2013.

The mixed economic reports and doubts over the viability of debt-ridden Spain's 2013 budget helped to push down U.S. stocks. U.S. government bonds rallied and the dollar rose against a basket of currencies.

Domestic Product Growth Slows

Slower consumer spending and a drop in farm inventories due to a severe drought in the Midwest held gross domestic product growth to a 1.3 percent pace in the second quarter, a step down from 2 percent in the first three months of the year.

Growth estimates for the third quarter range from 1.2 percent to 2.1 percent. Spending last month was funded by cutting back on saving, which economists said put households on shaky ground, particularly if incomes taxes go up in January.

Inflation pressures picked up last month on the back of the 28.2 cents per gallon rise in gasoline prices. A price index for personal spending increased 0.4 percent, the largest gain since March last year, taking the 12-month gain up to 1.5 percent from 1.3 percent in July.

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