US consumer spending and slowing core inflation in May

  • Consumer spending increases by 0.2% in May
  • Inflation-adjusted consumer spending falls 0.4%
  • The Core PCE price index increases by 0.3%; up 4.7% year-on-year
  • Weekly jobless claims fall by 2,000 to 231,000

WASHINGTON, June 30 (Reuters) – U.S. consumer spending rose less than expected in May as motor vehicles remained in short supply while rising prices forced cuts in purchases of other goods, a another sign that the rebound in economic growth at the start of the second quarter is running out of steam.

Although Thursday’s Commerce Department report suggested that inflation had likely peaked, price pressures remained strong enough to keep the Federal Reserve on track for aggressive monetary policy tightening. Nonetheless, Fed officials should be pleased with the cooling in demand.

Rising interest rates and tighter financial conditions are fueling fears of a recession, but economic data so far points to subdued growth. New jobless claims continued to fall last week, despite layoffs in the tech and housing sectors, other data showed on Thursday.

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“The Fed has yet to win the war on inflation, but there are some pretty encouraging signs that the economy is slowing down,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Despite recession fears, layoffs have not quite reached high enough levels to suggest the economy is heading for the cliff into the depths of recession.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.2% in May, the weakest increase in five months. April’s data has been revised down to show spending rose 0.6% instead of 0.9% as previously reported.

There have also been downward revisions to data dating back to January, showing a weaker growth pattern for spending this year.

Spending on goods intended to last three years or more fell 3.2%, dragged down by motor vehicles. Purchases of furniture and durable household equipment also fell, as did leisure goods and vehicles. This partially offset a 0.7% increase in services, which was driven by housing and utilities as well as healthcare and international travel.

Economists polled by Reuters had forecast consumer spending to rise 0.4%. The report joins data on housing starts, building permits and manufacturing output in suggesting the economy was struggling to gain altitude after gross domestic product fell at an annualized rate of 1.6 % in the first trimester.

Wall Street stocks were down. The dollar remained stable against a basket of currencies. US Treasury prices rose.


The US central bank raised its key rate this month by three-quarters of a percentage point, its biggest hike since 1994. The Fed has raised its key overnight rate by 150 basis points since March.

Inflation maintained its upward trend in May. The personal consumption expenditure (PCE) price index rose 0.6% last month after gaining 0.2% in April. In the 12 months to May, the PCE price index climbed 6.3% after a similar gain in April. It was stimulated by the rise in the prices of goods and services.

But the underlying price pressures are starting to ease. Excluding the volatile components of food and energy, the PCE price index rose 0.3% for the fourth consecutive month.

The so-called core PCE price index rose 4.7% on an annual basis in May, the smallest increase since last November, after rising 4.9% in April. PCE price indexes are the Fed’s preferred measure for its 2% inflation target.

PCE price indices are lagging behind the consumer price index, which rose 8.6% year-on-year in May, as they have less weight to rapidly rising residential rents. While health care has a greater weight in PCE measures, legislative reductions in Medicare payments have lowered the prices of medical services. They also benefited from lower financial service costs amid falling asset prices.

“June and July data could also show a similarly weak PCE relative to the CPI, but we expect the Fed to need to see evidence of easing inflationary pressure across a range of data. before slowing the pace of rate hikes,” said Veronica Clark, economist. at Citigroup in New York.

Inflation-adjusted consumer spending fell 0.4% in May, the first decline since December. That, combined with strong inventory accumulation in the first quarter, particularly at general merchandise stores, poses a downside risk to economic growth in the second quarter. Growth estimates for this quarter range from as low as 0.3% to as high as 2.9%.

But with a tight labor market generating solid wage increases and still abundant household savings, subdued nominal spending should prevail, supported by services. This should help limit job losses.

Wages rose 0.5% in May, contributing to the 0.5% rise in personal income. The savings rate rose to 5.4%, the first increase this year, after 5.2% in April.

A separate Labor Department report showed initial claims for state unemployment benefits fell from 2,000 to a seasonally adjusted 231,000 for the week ended June 25.

“Given that the provision of services disproportionately accounts for more jobs than the production of goods, the labor market remains quite tight,” said Bill Adams, chief economist at Comerica Bank in Dallas. “It mitigates the self-perpetuating transmission from lower spending to job cuts, lower income and even lower spending.”

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Reporting by Lucia Mutikani; Editing by Nick Zieminski and David Gregorio

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