U.S. Consumer Spending Drops 0.1% in May, Lowest Growth Since 2020

U.S. consumer spending saw an unexpected decline in May, with a 0.1% decrease, contrary to market expectations of a 0.1% growth. This downturn follows a period of heightened early shopping activity, which has since subsided, leading to a near-stall in consumer spending for the quarter. Service spending also decreased, resulting in a modest 0.5% increase in overall consumer spending for the quarter, the lowest since the second quarter of 2020.

This data indicates a soft growth path for consumer spending in the second quarter. The combination of weak consumer spending and moderate inflation is not sufficient to prompt the Federal Reserve to resume rate cuts in July. Economists attribute the current mild inflation to businesses still depleting the inventories they accumulated before the tariffs took effect. They anticipate that inflation will pick up starting from the June Consumer Price Index data.

The decline in consumer spending is significant given the recent economic conditions, where consumer confidence had been relatively stable. This unexpected drop suggests that consumers may be feeling the impact of higher prices and economic uncertainty, leading them to tighten their spending habits. The moderate rise in inflation adds another layer of complexity to the economic landscape, with prices for goods and services remaining elevated despite efforts to control it. Service prices, in particular, have seen a notable increase, contributing to the overall inflationary pressure.

Higher prices for goods and services can lead consumers to cut back on discretionary spending, as they prioritize essential items. This shift in consumer behavior can have a ripple effect throughout the economy, affecting businesses that rely on consumer spending for revenue. The moderate increase in inflation suggests that while prices are rising, they are not doing so at an alarming rate. However, the sustained elevation of prices can still have a negative impact on consumer confidence and spending.

The economic outlook remains uncertain, with various factors at play. The decline in consumer spending and the rise in inflation are just two of the many indicators that economists and policymakers are monitoring. The interplay between these factors will shape the economic trajectory in the coming months, and it will be crucial for policymakers to address these challenges to ensure sustained economic growth. The unexpected drop in consumer spending and the moderate rise in inflation highlight the need for vigilant monitoring and proactive measures to stabilize the economy.