Personal income falls as spending rises in August

NEW YORK (CNNMoney) -- Americans earned less money last month than they did the month before, according to government data released Friday, but spending still rose.

The report showed personal income fell 0.1% in August, after increasing 0.1% the month before. It's the first time income has dropped in two years and a move that could mean less spending power at a time when the economy is in desperate need of a boost.

Economists surveyed by Briefing.com were expecting a rise of 0.1% in income.

But for now, spending is still rising, albeit at a slower pace. Personal spending edged higher to 0.2% in August, after rising 0.8% in July, in line with expectations, but still relatively weak.

"In order to cope with higher prices for most goods and services - especially good and gasoline -- many households had no choice but to save less, spend more and get less," wrote economist Chris Chistopher, in a report for IHS Global Insight.

"All of this is happening in an economic environment with volatile equity markets, falling household assets, diminishing 401(k)s, high unemployment and depressed consumer confidence," he said.

Consumer spending accounts for roughly 70% of U.S. economic activity, but so far, has been struggling to recover from the financial crisis. The economic slowdown and volatile markets have been weighing on investors and consumers, holding back spending.

John Lonski, chief economist for Moody's Capital Markets Group, said that the declining income is the result of ongoing high unemployment and zero job growth, as well as increasing downward pressure on wages and salaries that is squeezing the American consumer.

For now, Lonski said that Americans are dipping into their savings and using credit cards to make purchases. But that won't last forever.

GDP: Growth is weak, but better

"It's impossible in this environment for spending to continue to rise if incomes are flat or lower," he said.

The savings rate was also down. Personal savings dropped to $519.3 billion in August from $559.5 billion in July. This means that personal savings made up 4.5% of disposable income in August, compared to 4.7% the prior month.