(Reuters) - Consumer spending dropped in June for the first time in nearly two years as incomes barely rose, suggesting economic growth could remain subdued in the third quarter. The Commerce Department said on Tuesday consumer spending slipped 0.2 percent, the first drop since September 2009, after edging up 0.1 percent in May. Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.2 percent. When adjusted for inflation, spending was flat in June after easing 0.1 percent the prior month. "The growth potential for the economy has slowed significantly," said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York. U.S. Treasury prices rose on the weak report, while the dollar pared gains against the euro. Consumer spending is being hampered by a 9.2 percent unemployment rate and the labor market's health could very well determine how fast the economy recovers from its first-half dismal performance. Budget cuts in Washington could also hamper the economy's recovery, although most of the fiscal restraint imposed by a plan the Senate will vote on Tuesday won't take hold for years. June's spending data already has been reflected in the second-quarter Gross Domestic Product report released last Friday, which showed the economy grew at an anemic 1.3 percent annual rate in the April-June quarter. Spending barely grew in the second quarter, inching up at an annual rate of only 0.1 percent -- the weakest pace since the end of the 2007-09 recession. Spending increased at a 2.1 percent rate in the first quarter. The decline in spending in June came even as gasoline prices retreated from their peak just above $4 a gallon in early May and suggested the much-anticipated bounce back in growth in the third quarter would lack vigor. The weak spending in June also reflected tepid income growth after employment growth ground to a near halt in June, with nonfarm payrolls rising only 18,000. Nonfarm payrolls are expected to have increased 85,000 in July, according to a Reuters survey. The government will release its closely followed employment report for July on Friday. Incomes ticked up 0.1 percent in June, the smallest increase since November, after rising 0.2 percent in May. Disposable income edged up 0.1 percent, also the smallest increase since November. But when adjusted for inflation, disposable income rose 0.3 percent. With real disposable income outpacing spending, savings rose to $620.6 billion from $581.7 billion in May. But there was some silver lining in the general weak report, which showed overall inflation pressures subsiding as gasoline prices decline a bit. The personal consumption expenditures price (PCE) index fell 0.2 percent, the first decline since June, after rising 0.2 percent in May. Compared to June last year, the index was up 2.6 percent after increasing 2.6 percent in May. But the core PCE index -- excluding food and energy - rose 0.1 percent after gaining 0.2 percent the prior month. The core index, which is closely watched by Federal Reserve officials, increased 1.3 percent in the 12 months through June. The index rose 1.3 percent year-on-year in May and the Fed would like to see it close to 2 percent. (Reporting by Lucia Mutikani, Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)

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