US Consumer Spending Drops 0.1% in May Amid Inflation Surge

In May, consumers in the United States faced a challenging economic environment as inflation surged, leading to a significant pullback in spending. This double whammy of bad news—rising prices and reduced consumer confidence—created a perfect storm that dampened retail activity. The economic slowdown, coupled with the persistent effects of tariffs, contributed to a grim outlook for the retail sector. Consumers, already grappling with higher costs, became more cautious with their spending, opting to tighten their belts rather than engage in discretionary purchases.

Overall spending in May fell 0.1% from the prior month and incomes fell 0.4%, according to the Commerce Department. This data indicated a rapidly downshifting economy, coming on the heels of a report that first-quarter GDP shrank more than expected. 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. However, 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.

Retail sales also dropped sharply last month, contracting 0.9%, according to a separate report. 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,” 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,” an economist 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. 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,” an economist said. The economic slowdown was evident as investors pulled back, sensing a marked deceleration in economic activity. The Federal Reserve, in response to the slowing economy, was likely to maintain a pause on interest rate hikes. This decision was aimed at providing some relief to consumers and businesses, but it also highlighted the broader economic uncertainty that had taken hold. The pause in rate hikes was seen as a necessary measure to avoid further straining an already fragile economy, but it also underscored the challenges ahead.

The retail sector, in particular, felt the brunt of the economic downturn. Consumers, who had been feeling more optimistic about the economy in previous months, saw their sentiment plummet in May. The combination of rising inflation and economic uncertainty led to a significant drop in consumer confidence, which in turn translated into reduced spending. Retailers, already struggling with the impact of tariffs, found themselves in an even more precarious position as consumers tightened their purse strings.

The economic slowdown was not limited to the retail sector. Investors, sensing the broader economic malaise, adopted a more cautious approach. The Federal Reserve's decision to pause interest rate hikes was seen as a recognition of the economic challenges facing the country. While the pause provided some relief, it also highlighted the need for continued vigilance and careful management of the economy.

The economic slowdown had far-reaching implications for the broader economy. The pullback in consumer spending, coupled with the cautious approach of investors, created a challenging environment for businesses. The retail sector, in particular, faced significant headwinds as consumers became more selective in their spending. The economic slowdown also highlighted the need for policymakers to take proactive measures to support the economy and restore consumer confidence.