By Jeffry Bartash
The numbers: Americans raised spending in May by just 0.2% — the smallest increase in 2022 — as high inflation made them more cautious about what they buy and how much.
Economists polled by The Wall Street Journal had forecast a 0.4% gain. The increases in spending from February to April were also marked down, revised government figures show.
Rising prices due to high inflation is altering consumers’ spending habits. A key measure of inflation included in the report rose sharply again in May .
Incomes rose a somewhat stronger 0.5% last month, but inflation is still rising faster than wages and leaving most Americans worse off financially.
The rate of inflation as measured by the so-called PCE index rose 6.3% in the 12 months ended in May. The better known consumer price index has climbed 8.6% in same span to mark the highest level since 1981.
As a result, inflation-adjusted disposable income has shrunk 3.3% in the past year.
Big picture: The fate of the economy in the next year will be dictated by consumers. If they spend at relatively robust levels despite high inflation and rising interest rates, businesses are unlikely resort to mass layoffs and trigger a recession.
But if consumers hunker down and reduce spending, as they did in May, the economy could be in trouble.
Key details : Americans spent more on gas, housing and utilities in May, but those aren’t the kind of purchases that are good for consumers or the economy. The spending largely reflects higher prices.
Consumers cut spending on new cars and trucks. For the first time in four months they also spent less dining out.
The outlook isn’t much better. The fuel bill for households is likely to be even higher in June following another increase in prices at the pump.
Grocery prices have also surged. Ditto for rents. These are the biggest staples for most consumers.
One bit of good news: The U.S. savings rate was not as low as previously reported.
The savings rate registered a solid 5.4% in May, suggesting households aren’t rapidly drawing down their rainy-day funds as it appeared in the April report.
Looking ahead: “It should really come as no surprise that U.S. consumers are paring their spending due to the high costs of, well, almost everything,” said senior economist Jennifer Lee of BMO Capital Markets. “So that means slower momentum as the second quarter began.”
Market reaction: The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.71% and S&P 500 /zigman2/quotes/210599714/realtime SPX +0.19% fell sharply in Thursday trades, as a recent rally lost steam.