By Martin Crutsinger | The Associated Press | Aug. 29, 2008

WASHINGTON (AP) — Personal incomes plunged in July while consumer spending slowed significantly as the impact of billions of dollars in government rebate checks began to wane.

The Commerce Department reported Friday that personal incomes fell by 0.7 percent in July, the biggest drop in nearly three years and a far larger decline than the 0.1 percent decrease that analysts had expected.

Consumer spending edged up a modest 0.2 percent, in line with expectations, but far below June's 0.6 percent rise. When the impact of rising prices was factored in, spending actually dropped by 0.4 percent in July, the weakest showing for inflation-adjusted spending in more than four years.

The July performance for incomes and spending reinforced worries that the economy, which posted better-than-expected growth in the spring because of the rebate checks, could stumble in coming months as their impact fades.

Some economists worry that overall economic growth, which rose at a 3.3 percent annual rate from April-June, could come in at less than half that pace in the current quarter, and could actually dip into negative territory in the final three months of this year and the first quarter of 2009. Back-to-back declines in the gross domestic product would meet one rule of thumb for a recession.