July 5, 2022 — Consumer Spending Slows


US consumer spending slowed in May, increasing by 0.2 percent; the smallest gain seen in 2022;  down from a revised 0.6 percent gain in April. The Federal Reserve Bank of Atlanta is estimating output contracted 1 percent during the second quarter, following a 1.6 percent contraction experienced in Q1. Two consecutive quarters of contraction does not mean a recession is happening, though some groups do define a recession as such. It seems a near term downturn is a certainty.

After-tax inflation-adjusted income declined 0.1 percent in May, and inflation adjusted spending was down 0.4 percent in May. The PCE (personal consumption expenditures) index, the preferred gauge of inflation used by the Fed, was up 6.3 percent year-over-year.  Consumers are now dipping into their savings to cover rising expenses.

The Fed meets again on July 14-15 and, at the moment, expectations are for another 0.75 percent increase as inflation holds strong. The FOMC members are estimating the benchmark rate to rise to 3.4 percent by the year end, up from the current 1.5-1.75 percent, as they try to tame inflation.