US Consumers Lose Steam, Setting Economy Up for Sharp Slowdown

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(Bloomberg) — U.S. consumer spending — a key driver of the economy — has lost steam for most of this year, portending weak growth ahead while also helping to calm inflation.

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Inflation-adjusted spending changed little in May and has essentially stalled since a spike in the first month of 2023, according to Bureau of Economic Analysis figures published Friday. That could help ease price pressures further after one of the Fed’s favorite measures of inflation fell last month to its lowest level in more than two years.

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On the heels of data released Thursday showing that US gross domestic product was revised up significantly in the first quarter, in part due to better-than-expected spending, Friday’s numbers set the economy up for a significant slowdown.

“We had already anticipated a slowdown in spending in the second quarter,” Tim Quinlan and Shannon Seery, economists at Wells Fargo & Co., said in a note to clients. “Now it looks like we may need to cut our forecasts in half.”

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Weak consumer spending contrasts with recent data that paints a picture of a resilient economy rather than one on the brink of contraction. This was in large part due to the continued strength of the labor market.

Strong developments in jobs and wages, which have boosted the economy through more than a year of high interest rates, have been at the heart of the Fed’s messaging that rates may need to raise to eventually tame inflation. Although Friday’s figures showed slowing spending and inflation, they may not be enough to dissuade officials from further tightening, Rubela Farooqui, chief US economist at High Frequency Economics, said in a note.

“For the Fed, moderation in consumption will be welcome news, as will slowing inflation,” Farooqui said. “However, these developments are unlikely to change the course of policy in the very near term, with policymakers sticking to the view that rates need to rise further, to a more restrictive stance.”

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The report showed that the decline in real spending on goods largely reflects a decline in car purchases. Spending on services outpaced the more fixed expenditures of international travel and transportation.

Consumers are also saving at one of the highest rates since early last year, which could signal more caution ahead.

Reducing inflation

Commerce Department figures on Friday showed that the personal consumption expenditures price index rose 0.1% in May. A year ago, the rate fell to 3.8%, the slowest pace in more than two years.

Under cover of the government report, the key rate gauge set by Fed Chair Jerome Powell showed a welcome slowdown. Services inflation excluding housing and energy services rose 0.2% in May from the previous month, the smallest advance since July of last year, according to Bloomberg calculations. The figure is up 4.5% from last year.

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Read more: Powell’s preferred services inflation hits a 10-month low

Treasurys and the S&P 500 rose after the report, although traders still expect the Federal Reserve to resume raising interest rates at next month’s meeting, according to futures.

What does Bloomberg Economics say…

Personal income and expenditure data for the month of May show the relationship between income growth and a gradual decline in inflation. This makes us skeptical that the Fed will need to raise rates by the full 50 basis points shown in the most recent point chart.”

– Stuart Ball, Eliza Winger, and Jonathan Church

To read the full note, click here

While Friday’s numbers suggest rates may not need to rise as many Fed policymakers had anticipated, there is still plenty of data between now and the central bank’s July meeting that could shape their thinking. The June jobs report, which will be released next week, is expected to show hiring still strong and unemployment rates low. Officials will also see updated readings of consumer and producer prices as well as retail sales in the coming weeks.

— with assistance from Kristi Schauble.

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