Income and spending rose less than prices in May

Americans’ incomes and spending failed to keep pace with rising prices in May, the latest sign that the fastest inflation in a generation is eroding the foundation for economic recovery.

Consumer spending, adjusted for inflation, fell for the first time this year, down 0.4% from April, the Commerce Department said Thursday. In addition, spending grew more slowly in the first four months of the year than previously announced, the government said, and after-tax income, adjusted for inflation, fell slightly.

The report provided fresh evidence that the US economy is in a delicate balance as the Federal Reserve tries to bring inflation under control. Policymakers want to calm consumer demand for goods and services, which has outstripped supply, driving up prices. But if the central bank aggressively stifles demand when prices are already dampening consumption, it could trigger a recession.

Consumers have barely stopped spending. Overall demand remains strong, especially for vacation travel, restaurant meals and other services that many families avoided at the start of the pandemic.

Still, several forecasters said Thursday they now believe U.S. gross domestic product, adjusted for inflation, fell in the second quarter. It would be the second consecutive decline – a common, albeit unofficial, definition of a recession. Most economists say the United States has not yet entered a recession by the more formal definition, which takes into account a variety of economic indicators, but they say the risks are growing.

Data released on Thursday hinted at some potential moderation in inflation. The personal consumption expenditure price index, which the Fed officially targets when aiming for inflation to average 2% over time, climbed 6.3% from a year earlier, matching the April increase. Compared to the previous month, it rose 0.6%, a rapid pace as gasoline prices rose.

But the core price index, which excludes volatile food and fuel prices, has climbed 4.7% over the past year, down slightly from 4.9% in the previous reading. This basic measure rose 0.3% from April, roughly matching the previous months.

Policymakers “are probably sitting there quietly and feeling a bit relieved” that core price increases have moderated, said Ian Shepherdson, chief economist at Pantheon Macroeconomics. But inflation remains very high, its outlook depends on variables such as the war in Ukraine, and the latest data should not encourage the Fed to change course.

“Now is not the time to declare even a hint of potential victory,” Mr Shepherdson said.

Inflation weighs on consumers’ finances and their economic prospects. Fifty-two percent of American adults say their financial situation is worse than a year ago, according to a survey for The New York Times conducted June 13-19 by online research platform Momentive. Ninety-two percent say they are concerned about inflation, including 70% who say they are “very concerned”.

Until recently, there was no evidence that consumer gloom was having a big impact on their spending. But that may be starting to change. Consumer spending, not adjusted for inflation, rose 0.2% in May, the smallest gain this year, and spending on goods, where price rises have been fastest, fell.

In other regions, consumers are spending more but getting less: households bought almost exactly the same amount of gasoline in May as they did in April, for example, but paid 4% more for it.

Tim Trull put $35 worth of gas in his truck on a recent Friday and was empty again after a weekend visit to his parents 30 miles away. He is therefore looking for other places to reduce. Trips to the grocery store have become a boring routine: bread, cheese, eggs, milk, whatever lunchtime meat is on sale. Mr. Trull said he didn’t even walk down the meat aisle anymore.

“I love my Raisin Bran, but I can’t even buy Raisin Bran,” he said. “Raisin Bran is almost $7 a box right now.”

Mr. Trull, 51, got a 50-cent-an-hour raise over Christmas, but inflation has more than erased that, particularly because the furniture factory where he works in Hickory, North Carolina , began to reduce overtime. Now, speaking of recession, he fears losing his job.

“I just have a bad feeling that will eventually wear off and they will start firing people again,” he said. “Who’s going to buy furniture when you’re deciding on gas, food, or a new loveseat?”

Stories like Mr. Trull’s highlight the risk the economy faces if the labor market slows. Despite May’s decline, income for Americans overall has mostly kept pace with inflation thanks to rising wages and strong job growth.

However, the labor market is expected to cool in the coming months as the Fed raises interest rates in an effort to control inflation. Weaker wage growth and slower job gains — or, worse, outright job losses — would hamper income growth and could make people more reluctant to dip into their savings. This could make a recession more likely.

“If we start to see this slowdown in job growth, if we start to see some slowdown in wage growth, if we start to see some recovery in jobless claims, then I think the story begins really change,” said Michelle Meyer, chief U.S. economist at the Mastercard Economics Institute.

American households have also accumulated trillions of dollars in savings during the pandemic, thanks in part to government assistance. These savings could, at least in theory, help consumers continue to spend even if their incomes fall even further short of inflation. Households are already saving less to keep spending: Americans saved 5.4% of their after-tax income in May, up slightly from April but below the rate of about 7% in the years before the pandemic.

But families may be reluctant to dig too deep into their rainy-day funds if they’re worried about a possible recession, said Pablo Villanueva, senior U.S. economist for UBS.

“In recent months, the consumer has started to rely more on a lower savings rate to finance their consumption, and that can only last for a while, especially in an environment of very low consumer confidence,” said- he declared.