Soft Landing Odds Slip Away As Consumer Spending Fades

Personal spending rose half as much as expected in the world’s largest economy last month, closely watched data out Thursday showed.

The lackluster read on consumption was insult to injury following a sharp (or “shock” if you like hyperbole) downward revision to the spending component of first quarter GDP.

May’s meager 0.2% rise compared unfavorably to expectations for a 0.4% gain. Downward revisions, including a large cut to April’s print, didn’t help. Real personal spending fell 0.4% (red dashed line in the figure, below), more than economists anticipated.

There was evidence of goods-to-services switching. The entirety of May’s gain in current-dollar spending was attributable to services categories. Spending for goods fell $43.5 billion. Consumers spent less on new cars, even as they spent more on gas to fill up the ones they already have.

When taken in conjunction with the surprise cut to spending figures in the final read on Q1 GDP, Thursday’s data painted a somewhat discouraging picture. Consumer sentiment has never been worse, and the Conference Board’s gauge of expectations dropped to the lowest in a decade this month, according to the June release, out earlier this week.

Plainly, Americans aren’t enamored with generationally high inflation. The hit to consumer psychology, alongside the economic realities that go along with negative real wages, are bleeding into the spending data. Personal incomes were in line for May, but real disposable personal income has been flat or negative since inflation took off and government transfer payments receded.

On the bright side, PCE prices came in slightly cooler than expected on the monthly reads. Headline PCE rose 0.6% from April and core prices 0.3%, both a touch lower than consensus.

Nevertheless, the MoM rise in core prices didn’t count as “improvement.” Unrounded, it was brisker than the prior month’s pace (figure above).

The 12-month prints on headline and core were 6.3% and 4.7%, respectively. So, on a YoY basis, the pace of core inflation retreated for a third consecutive month, even as headline remained sticky.

It’s hard to come away from these figures optimistic about spending in Q2. This should impact estimates for consumption this quarter, and could easily be described as incremental evidence to support the recession narrative. Given little progress on inflation (and certainly nothing like the kind of progress the Fed would need in order to consider backing away from aggressive rhetoric), you’ll be forgiven for any dour outlook you might be inclined to harbor.

As for the notion that slower spending is actually a constructive development given the Fed’s efforts to cool the economy, Bloomberg’s Cameron Crise captured it well. “Spending undershot expectations and was revised lower in April suggest[ing] monetary policy is working as intended, but the landing strip for the Fed to engineer slower demand growth without inducing a contraction looks to be about the size of a postage stamp,” he wrote.