U.S. Consumer Spending Declines

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer spending unexpectedly fell in May as the pre-emptive buying ahead of the Trump administration’s tariffs faded. Monthly inflation maintained a moderate pace.

The Commerce Department’s report on Friday likely will not impact near-term monetary policy, as Fed Chair Jerome Powell indicated the need for more time to assess the tariffs’ effects on prices before contemplating interest rate cuts.

Business surveys suggest tariffs may boost prices this summer, a view shared by Powell and many economists. Trump’s sweeping tariffs led consumers to front-run imports, complicating the economic landscape.

Sal Guatieri, a senior economist at BMO Capital Markets, stated, “The report is a wash for the Fed and won’t alter its wait-and-see stance.” The decline in May’s spending reflects payback from earlier tariff actions while the core price increase doesn’t clarify the tariffs’ inflation impact.

Consumer spending, which constitutes over two-thirds of economic activity, dropped 0.1% in May after an unrevised 0.2% gain in April, representing the second decline this year. Economists had predicted a slight rise of 0.1%.

Goods spending decreased 0.8%, with long-lasting manufactured goods, particularly motor vehicles, seeing a 1.8% drop. Nondurable goods spending also dipped, partly due to lower gasoline prices.

Spending on services saw a minor 0.1% rise, the smallest since November 2020. This was constrained by reduced spending on accommodations and dining out. There were also declines in financial, insurance, and transportation services, though households increased expenditures on housing, utilities, and healthcare.

Soft consumer sentiment aligns with a noted decrease in discretionary spending. A University of Michigan survey indicated that June’s consumer sentiment remains 18% below its peak in December, reflecting pessimism regarding economic slowdown and impending inflation.

Wall Street stocks rose, with the S&P 500 and Nasdaq reaching intraday highs as investors speculated on further Fed rate cuts, resulting in a weaker dollar against the euro.

Consumer spending growth is slowing, with earlier purchases now resulting in decreased spending. Last quarter’s consumer spending increased only 0.5%, the slowest since mid-2020, after a surge in imports widened the trade deficit, contributing to a GDP decline.

The Atlanta Fed revised its Q2 GDP growth estimate down to 2.9% from 3.4%. Economists caution that tariff-related distortions may take time to clear from data.

Despite recent weakness, a collapse in spending seems unlikely as wages grew by 0.4% last month. However, personal income fell by 0.4%, marking the most significant decrease since September 2021, as the boost from certain Social Security payments dissipated. The saving rate decreased to 4.5%.

Michael Pearce of Oxford Economics remarked that the savings rate is in line with past averages, indicating consumers are not sharply cutting back on spending.

The Personal Consumption Expenditures (PCE) Price Index rose 0.1% in May, matching the April increase, influenced mainly by falling gasoline prices offsetting rising costs for durable goods. Overall goods prices edged up 0.1%.

PCE inflation increased 2.3% year-on-year by May, as core inflation rose 2.7%. Economists attribute moderate price increases to inventories built before tariff implementation, expecting inflation to rise based on forthcoming consumer price data.

However, some predict that reduced demand could hinder businesses from passing tariffs onto consumers. The Fed tracks PCE measures for its 2% inflation target while maintaining interest rates in the 4.25%-4.50% range.

Expectations are for rate cuts to resume in September, with Citigroup’s Andrew Hollenhorst asserting that while some goods prices may rise, broad-based inflationary pressures remain unlikely due to slowing service spending.