U.S. Consumer Spending Cools

U.S. consumer spending fell in May for the first time this year, and prior months were revised lower, suggesting an economy on somewhat weaker footing than previously thought amid rapid inflation and Federal Reserve interest-rate hikes.

Purchases of goods and services, adjusted for changes in prices, decreased 0.4 percent after a downwardly revised 0.3 percent gain a month earlier, U.S. Commerce Department data showed Thursday. Spending on services advanced, while outlays for goods declined.

The personal consumption expenditures (PCE) price index, which the Federal Reserve uses for its inflation target, rose 0.6 percent from a month earlier and was up 6.3 percent since May 2021. The core PCE price index increased 0.3 percent, less than expected. It was up 4.7 percent from a year ago, the smallest gain since November.

The median forecasts in a Bloomberg survey of economists called for a 0.3 percent decline in inflation-adjusted spending from the prior month and for the overall price index to be up 6.4 percent from a year earlier. Stocks opened lower, and Treasury yields eased after the data.

Unadjusted for inflation, spending rose 0.2 percent from the prior month, while personal income increased 0.5 percent.

While spending disappointed expectations, it also showed demand isn’t collapsing. Demand for services proved resilient, underscoring a long-anticipated shift in consumer preferences from goods to services. Spending on international travel strengthened in May.

Even so, the slowdown in consumer spending—the main driver of the U.S. economy—adds to growing concerns about the economic outlook. Household sentiment is at a record low; recession fears are growing; and the labor market, while still robust, is showing some early signs of softening.

“Today’s details on monthly spending figures show a much weaker profile for spending in the first five months of the year and set us up for weaker growth in the second quarter than the data would have suggested just 48 hours ago,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery said in a note after the report.

Inflation, while showing signs of stabilizing, is still eroding Americans’ pay. Households are facing rising prices across the economy, including near-record costs for gasoline. The Fed, which earlier this month raised interest rates by the most since 1994, will take the latest figures into account at their July meeting when deciding whether to once again hike rates by 75 basis points (bps) or opt for a 50 bps increase.

What Bloomberg Economists Say…

“The drop in real personal spending in May—coupled with downward revisions to the data from January to April—means less momentum for consumption and the overall economy going into the second half of the year. The data indicate weaker growth in services amid a general pullback in goods spending, with inflation weighing on purchasing power and sentiment at record lows.”

—Yelena Shulyatyeva & Andrew Husby, Bloomberg economists

On Wednesday, Fed Chair Jerome Powell said he and his colleagues “hope that growth will remain positive,” noting that the economy is “well-positioned to withstand tighter monetary policy.” But he also acknowledged that the task of avoiding a recession has become more challenging in recent months.

Saving Rate

The saving rate rose slightly in May, to 5.4 percent, a three-month high, but was still near its lowest since 2009. High inflation has prompted Americans to draw down their savings since the end of last year.

The consumer price index (CPI), which typically runs hotter than the PCE price index, unexpectedly jumped to a fresh 40-year high in May. Inflation-adjusted spending on goods dropped 1.6 percent in May, the biggest drop this year, while services increased 0.3 percent. Spending on motor vehicles led the decline in goods outlays, according to the Commerce Department.

Services were boosted by housing and utilities, as well as healthcare.

Wages and salaries increased 0.5 percent last month. When adjusted for inflation, however, disposable personal income declined 0.1 percent, the third decrease this year. Separate figures Thursday showed applications for jobless benefits fell slightly last week, though remained near the highest level since January.

—With assistance from Kristy Scheuble & Olivia Rockeman.

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