Consumer Spending Stalled Last Month

Private consumption slowed sharply last month. That’s good news for policy makers worried about inflation, but it’s also a sign that a key driver of the economic recovery may be finally running out of steam.

U.S. consumer spending rose just 0.1% month-on-month in May, according to the Department of Commerce said on friday. That was down from April’s 0.6% growth, which was downgraded from previous forecasts of 0.8%. Adjusted for inflation, spending was flat in May. That number could fluctuate from month to month, but forecasters expect spending to continue to cool as rising interest rates and declining savings hit consumers’ wallets hard.

The astonishing resilience of consumer spending is a big reason why the economy has so far defied recession predictions. For much of this year, Americans have continued to spend big on cars, vacations and restaurant meals, making up for weakness in other sectors of the economy such as business investment and housing. If this situation changes, a recession may be inevitable.

Still, a gradual slowdown would be welcome news to Fed officials who have worried that strong consumer demand is pushing up prices and making it harder for the central bank to control inflation.

Policy makers aren’t going to get too comfortable with a month’s worth of data. Spending had shown signs of slowing in the past, most recently at the end of last year, but picked up again a few months later. And as long as the job market remains strong, Americans will have money to spend. Personal income rose 0.4% in May, slightly higher than in April, as wages and salaries continued to rise strongly.

But this time around, there are signs that consumers are becoming more cautious. After months of draining their savings amid rising prices, Americans began saving more, a historical sign of economic concern. It also suggests that more households are falling behind on their debt payments, making it harder to keep up with rising prices.

“Consumers are probably exercising caution and saving because many believe a recession is coming or imminent,” Robert Frick, a corporate economist at the Navy Federal Credit Union, said in a note to clients. We are increasing and spending less,” he said.

Fed officials will have a fresh look at the labor market next week as the Labor Department releases data on job openings, employment and unemployment.

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