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Consumer spending growth slows in May, as higher prices weigh on the economy

Consumer spending ‘Did the stimulus checks lead to inflation?’ Your questions are answered.

Policymakers and economists are keeping a close watch for indications that consumer spending — which makes up over two-thirds of the U.S. economy — may be losing steam. Some of that slowdown is by design, as the Federal Reserve takes steps to cool the economy by aggressively raising interest rates. But there are also fears that a more substantial consumer pullback could tip the economy closer to a recession.

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“We do expect to see a slowing of consumer spending growth as we transition to steady, stable growth,” a senior White House official said in a Wednesday afternoon news briefing. But, the official added, “we’ve seen relatively little evidence of that to date.”

This year, the U.S. economy unexpectedly shrank in the first three months. On Wednesday, the BEA said the contraction was even deeper than expected: It revised down its gross domestic product reading by 0.1 percent to a 1.6 percent annualized rate after factoring in slower-than-expected growth in consumer spending in the first quarter.

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Americans are starting to pull back on travel and restaurants

There has also been a marked shift in where Americans are spending their money. In recent months, they’ve stopped buying as many used cars and appliances and instead have begun shelling out more heavily on services like dining out, entertainment, and travel. Indeed, Americans spent nearly $44 billion less on goods in May, but $76 billion more on services like housing, utilities, international travel, and hospital care.

But there are also signs that more families are beginning to rethink some of that spending. U.S. flight bookings dipped 2.3 percent in May from a month earlier, according to data from Adobe Analytics. And both high- and low-income Americans have begun pulling back, particularly on services, in the past four to six weeks, according to an analysis of credit card data by Barclays.

“Consumers are still spending, but we’re also seeing a shift where they’re saying, ‘We’re going to postpone our vacation,’ or ‘Maybe I don’t need to buy a new washing machine right away,’ ” said Quincy Krosby, a strategist for LPL Financial. “They are rethinking their consumption levels, and that’s because of higher gasoline prices, lodging, and food prices.”

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Fast-rising prices have become a defining challenge for the Biden administration. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures price index, remains near four-decade highs. A separate inflation benchmark, the widely used consumer price index, has shown that prices rose 8.6 percent in May compared with a year earlier.

The inflation benchmark PCE analyzes price changes of everyday goods but places less importance on gas prices and housing costs than CPI does. Both inflation benchmarks show that everyday costs are soaring in a way that’s leading many Americans to pull back on certain types of spending.

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Consumer sentiment fell to its lowest level ever in June, according to a closely watched survey by the University of Michigan, with nearly half of Americans saying inflation has eroded their living standards.T3RH6EXUNII6XJRWDDFMLGUY3Q

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