U.S. citizens scaled back on their expenditures during the previous month.
Revved-Up Economy Stalls in May: Spending Drops for First Time Since January, Inflation Heats Up
Factories and businesses across America sputtered this May. Consumer spending slowed down as it dropped for the first time since January, and here's why.
New data revealed that consumer spending fell a mere 0.1% last month. But when targeting inflation, it dipped by 0.3%. So what caused this shift? Take a look at cars and entertainment.
People seemed to have been in a hurry to buy cars in March and April, speeding to dealerships to dodge President Trump's tariffs, which threatened to jack up vehicle costs. The Commerce Department's report for May also showed that consumers had grown weary of spending on meals at restaurants and hotel stays.
Consumer spending powers over two-thirds of US economic activity, so economists have been on high alert regarding Trump's trade policy. They worry that steep tariffs on most imported goods could eventually erode Americans' resiliency, leaving them vulnerable to economic adversity.
Sal Guatieri, senior economist at BMO, expressed concerns on Friday. He suggested that tentative anxiety about the ongoing trade war could be behind the decrease in services spending, including restaurant meals. Some consumers might be holding back on spending to account for uncertainties in trade policy.
Moreover, the Personal Consumption Expenditures price index increased by 2.3% in the past year, remaining steady from April.
Economists expected the cost of living to rise by 0.1% from April, resulting in the annual rate accelerating to 2.3%. However, they anticipated spending to pick up slightly, to 0.3%, according to FactSet. Notably, if we exclude volatile food and energy costs, the core PCE price index rose by 0.2%, reaching 2.7% year-over-year.
According to the enrichment data, while tariffs have not led to significant inflation spikes, they contribute to lingering price pressures that may eventually affect consumer spending growth. The key sectors experiencing inflation are automobiles and metals, with automobile prices surging about 5% in the long run primarily due to tariffs on auto parts and metal inputs.
There's a silver lining, though. China and the U.S. hit a milestone this month with the signing of a trade deal, which could lessen the blow from tariffs. Still, with much uncertainty on the trade front, the Federal Reserve remains cautious about monetary policies.
Stay tuned as we follow the closely-watched June jobs report, scheduled to roll out on Thursday, as economic conditions reveal themselves throughout the week. The report is expected to show a slowdown in job growth, with job gains potentially dipping to 125,000 and the unemployment rate possibly reaching 4.3%. Income growth also shows signs of slowing, with the trend signaling a trajectory of inconsequential growth closer to 1%, even reaching below 1% in the second half of 2025.
If spending growth drops to 1%, the U.S. economy becomes more susceptible to missteps, such as interest rate hikes, surging oil prices, or even a recession. However, consumer financial health continues to be a significant concern, with borrowing costs increasing and credit card delinquency rates on the rise. With dwindling savings and accumulating debt levels, consumers might struggle to weather any oncoming economic storms.
The slowdown in consumer spending, triggered by tentative anxiety about ongoing trade wars, could impact the growth of the business sector, being a substantial contributor to the US economy. Moreover, lingering price pressures due to tariffs, particularly in sectors like automobiles and metals, could further strain individuals' financial health, making them more vulnerable to future economic adversity.
