US consumers barely increased their spending in July after their income grew more slowly, held back by steep government spending cuts that reduced federal workers' salaries.
The Commerce Department said consumer spending rose just 0.1% in July from the previous month. That is slower than June's 0.6% increase.
US consumers cut their spending on long-lasting manufactured goods, such as cars and appliances, while spending on services was unchanged. Income rose a slight 0.1% in July following a 0.3 percent June gain.
The tepid July gains in spending and income suggest the economy started the July-September quarter growing at weak pace.
Consumer spending drives roughly 70% of economic activity in the US.
The US economy grew at a 2.5% annual rate from April to June, the government estimated this week. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7% rate for April through June.
Analysts are hopeful that the economy will grow at an annual rate of around 2.5% in the second half of the year. But that expectation is based in part on continued job gains and modest wage increases, which should fuel more consumer spending and faster growth. Slower spending in July could alter those forecasts.
US economists also worry that rising interest rates could dampen consumer spending, particularly on homes and cars. Mortgage rates have already risen more than a full percentage point since May.
Interest rates could rise even further if the Federal Reserve decides to reduce its $85 billion a month in bond purchases at its September meeting. The Fed will consider the consumer spending and income data, along with this week's sharp revision in second-quarter growth, when making a decision next month. The bond purchases have helped keep long-term borrowing rates low.
But the most critical factor that the Fed will weigh is the August employment report, which will be released next Friday - the final jobs report before the Fed meets.