U.S. consumer spending has been revised sharply lower through the first four months of the year, and with May now reporting an outright contraction it is clear that the trajectory of the US economy is not looking good. Further interest rate rises and an ongoing squeeze on spending power mean that growth forecasts are likely to be cut with recession risks rising, according to ING Economics.
Inflation slows, but spending downturn warrants the headlines
The May personal income and spending report offers some good news in that the Federal Reserve’s favored measure of inflation – the core PCE deflator – slowed to 4.7% from 4.9% year-on-year versus the consensus forecast of 4.8%, but the activity front is not pleasant viewing, ING’s chief international economist, James Knightley, says.
Real consumer spending fell -0.4% month-on-month rather than -0.3% as the consensus predicted, while April’s reading was revised down sharply from 0.7%MoM growth to 0.3%MoM. Following the large downward revisions to first-quarter consumer spending data yesterday, it is clear that the consumer sector is not as resilient as we had hoped.
The details show the bulk of the weakness was in durable goods – products that last more than three years, such as cars. This component fell 3.5%, while non-durable goods, such as food and clothing, fell 0.6%. Services spending grew 0.3%, but it wasn’t enough to offset the damage elsewhere.
“With more interest rate hikes to come and the squeeze on spending power from gasoline prices unlikely to be eased anytime soon, the prospects for second-half consumer spending are deteriorating. There is a very clear threat that the prospect of recession is a late 2022 scenario rather than early 2023,” ING said.