American consumers have been gradually spending more money in the recovery, but that trend took a hit in July thanks to the automatic budget cuts that went into effect earlier this year. July’s consumer spending growth was just 0.1 percent more than last month in part because government workers are facing furloughs and salary cuts.
Overall wages and salaries plunged $21.8 billion from June to July, a third of which can be chalked up to furloughs in virtually every federal agency. As a result, Americans seem to be postponing purchases of long-lasting investments like cars and appliances even though they are still spending money on services.
Home sales and orders for durable goods also plummeted in July.
Consumer spending accounts for roughly 70 percent of economic activity. Economists predict that as a result of sluggish consumer spending, economic growth will be much weaker than it was in the first half of the year.
The new data is just one more piece of evidence indicating that the harsh across-the-board budget cuts, originally intended as a mutual threat to make House Republicans cooperate on a budget, are further hindering the sluggish economic recovery. Sequestration has dragged down GDP growth this year while killing about 700,000 jobs.
As early as May, nearly four in ten Americans said they were hurt personally by sequestration. Now that more budget cuts are kicking in, the number of people feeling the effects of lost jobs, slashed unemployment benefits, and the elimination of crucial services is certain to rise.