Americans are spending more, getting less
American households stepped up their spending in May. But prices rose even faster.
Consumer spending increased 0.2 percent last month, the Commerce Department said Thursday. But adjusted for inflation, spending fell 0.4 percent — the first decline this year, and the latest sign that rapidly rising prices, particularly for essentials like food and gas, are chipping away at the bedrock of the economic recovery.
Sky-high gas prices, a tumbling stock market and mounting talk of a possible recession have put consumers in a dour mood. But the problem for the economy is not their willingness to open their wallets. Nominal — not inflation-adjusted — spending has risen steadily all year, particularly for vacation travel, restaurant meals and other services that many families avoided earlier in the pandemic.
The problem is that, because of inflation, Americans are spending more but getting less. Households bought almost exactly the same amount of gas in May as in April, for example, but paid 4 percent more for it.
There are hints that high prices could be starting to take a toll on consumer demand. The 0.2 percent increase in nominal spending in May was the weakest this year, and spending on goods, where price increases have been fastest, actually fell. That could be welcome news for policymakers at the Federal Reserve,
who have been trying to bring down inflation by reining in demand.
Most forecasters still expect inflation-adjusted spending to increase in the second quarter as a whole and to keep rising in the second half of the year. But any sustained slowdown is likely to increase concerns that the economy is slipping into a recession. On Wednesday, a separate report from the Commerce Department showed that consumer spending rose more slowly in early 2022 than previously believed, and some economists now estimate that gross domestic product contracted in the second quarter, a second consecutive decline.
Still, consumers have mostly been able to overcome rising prices because their incomes — at least in the aggregate — have also been rising as the strong job market has pushed up wages and allowed more people to return to work. After-tax income rose 0.5 percent in May, nearly as fast as consumer prices, which were up 0.6 percent.
U.S. households also built up trillions of dollars in savings during the pandemic, in part because of government aid. Those savings could, at least in theory, help consumers keep spending even if their incomes fall further behind inflation. Americans saved 5.4 percent of their aftertax income in May, up slightly from April but below the roughly 7 percent rate in the years before the pandemic.
The combination of the strong job market and accumulated savings “are able to provide a buffer to the inflationary environment,” said Anna Zhou, an economist with the Bank of America Institute.
The job market is likely to cool in coming months, however, as the Fed raises interest rates to tame inflation. Weaker wage growth and slower job gains — or, worse, outright job losses — would dent income growth, and might also make people more reluctant to dip into their savings. That could make a recession more likely.
“If we start to see that slowdown in job growth, if we start to see some slowdown in wage growth, if we start to see a pickup in jobless claims, then I think the story really does start to shift,” said Michelle Meyer, U.S. economist for the Mastercard Economics Institute.