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Home Market Research Business

Consumer spending pulled back in May as inflation heated up—a double whammy of bad news

by TheAdviserMagazine
4 months ago
in Business
Reading Time: 2 mins read
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Consumer spending pulled back in May as inflation heated up—a double whammy of bad news
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For the first time this year, consumers pulled back on spending as the bad mood that’s been pervasive since tariffs hit caught up with retail data.

Overall spending in May fell 0.1% from the prior month and incomes fell 0.4%, the Commerce Department reported Friday. Coming on the heels of a report that first-quarter GDP shrank more than expected, the data show a rapidly downshifting economy.

“Personal consumption expenditures are weak and continue to weaken,” Eugenio Aleman, chief economist at Raymond James, told Fortune. 

“We knew that consumer demand has been on the weak side, but yesterday we had the revision to the first-quarter GDP, which reaffirmed that consumption wasn’t that strong. Today’s number just confirmed that this wasn’t a one-off.” 

Both spending and income figures were distorted by one-time changes. Spending on cars plunged, pulling down overall spending, because Americans had moved more quickly to buy vehicles in the spring to get ahead of tariffs. But spending on airfares, meals, and hotels all fell last month—signs of underlying consumer pressure rather than mere timing shifts. Spending on services overall rose just 0.1% in May, the lowest one-month increase in four and a half years. 

“Because consumers are not in a strong enough shape to handle those (higher prices), they are spending less on recreation, travel, hotels, that type of thing,” said Luke Tilley, chief economist at Wilmington Trust.

Retail sales also dropped sharply last month, contracting 0.9%, according to a separate report released last week.

Incomes also dropped after a one-time adjustment to Social Security benefits boosted payments in March and April, allowing some retirees who had worked for state and local governments to get higher Social Security payments.

Inflation heated up modestly, with prices rising at a 2.3% annual rate in May, compared with 2.1% in April. Core prices, which exclude volatile food and energy costs, increased 2.7% from a year earlier, up from April’s 2.6% rate. 

In the first three months of this year, consumer spending rose just 0.5% and has been sluggish in the first two months of the second quarter. Most economists think May’s figures signal a dramatic downshift to come. “The US economy is poised for a summer slowdown,” EY economists wrote. “Both consumer spending and business investment are expected to decelerate significantly.” 

In recent years, consumers have been able to keep spending more thanks to real income growth and a boost to some government benefits. “But these two supports have now mostly faded, and the real income picture is about to deteriorate rapidly, as tariffs drive up prices,” economist at Pantheon Macroeconomics said. With personal savings low and consumers too skittish to borrow, “consumption is likely to slow much further, and soon,” they said.

Real incomes are set to flatten this year, due partly to a weaker job market but also because prices are rising, they wrote. At the same time, the rate of inflation—2.7% annually—is significantly higher than the Federal Reserve’s 2% target, making it unlikely rate cuts are coming anytime soon.

“With so many uncertainties still lingering, the Fed will likely hold off on rate cuts for the time being,” Nationwide Financial Markets Economist Oren Klachkin said.



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Tags: badconsumerdoubleHeatedinflationNewspulledspendingupawhammy
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