August 4, 2004 -- The softening in consumer spending that Federal Reserve Chairman Alan Greenspan warned about last month came through resoundingly in June, as consumers tightened their purse strings, resulting in a 0.7 percent decrease in personal consumption, according to a report from the Commerce Department on Tuesday.

The falloff was the biggest drop since September 2001, when consumer spending plummeted 1.2 percent. June's decrease came on the heels of a strong May, which saw spending increase by 1 percent. The drop marked the first decline in consumer spending since September 2003.

The report also showed that personal disposable income grew modestly, rising 0.2 percent, a slowdown from the 0.6 percent increase in May. However, adjusted for inflation, income was actually unchanged from the previous month.

Consumers shied away from expensive items like cars in June. Spending on durable goods, or those meant to last three years or longer, dropped 5.9 percent after increasing 3.7 percent in May.

In a sign that July's consumer spending numbers should be better, a separate report released on Tuesday showed that motor vehicle sales recovered nicely in July, rising nearly 15 percent, after falling 15.4 percent in June.

In his July testimony before Congress, Greenspan indicated that he expected consumer spending to be less than spectacular, largely due to high energy prices.

"Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending," he said, "a softness which should prove short-lived."

The fall in spending numbers, coupled with last week's report that the U.S. economy grew at a relatively disappointing 3 percent annual rate in the second quarter, are not expected to deter the Federal Reserve from raising interest rates another quarter point next week, say economists.