Americans are still spending, but at a slower pace than a few months ago, a sign that the biggest part of the U.S. economy is beginning to moderate.
Consumer spending has so far been a bright spot in the U.S. economy, even as inflation hits 40-year highs. Although Americans say they’ve lost confidence in the economy — consumer sentiment measures have plunged to record lows — they have so far continued to pay for goods and services. But economists say there are signs that is beginning to change, as higher interest rates and slowing savings rates take a toll on families’ budgets.
“The good news is that we still have savings, but the bad news is that inflation is burning a hole in consumers’ pockets,” said Diane Swonk, chief economist at Grant Thornton. “This is a hard time for consumers, and we’re starting to see inflation eating into some forms of spending.”
Policymakers and economists are keeping a close watch for indications that consumer spending — which makes up over two-thirds of the U.S. economy — may be losing steam. Some of that slowdown is by design, as the Federal Reserve takes steps to cool the economy by aggressively raising interest rates. But there are also fears that a more substantial consumer pullback could tip the economy closer to a recession.
“We do expect to see slowing of consumer spending growth as we transition to steady, stable growth,” a senior White House official said in a Wednesday afternoon news briefing. But, the official added, “we’ve seen relatively little evidence of that to date.”
This year, the U.S. economy unexpectedly shrank in the first three months. On Wednesday, the BEA said the contraction was even deeper than expected: It revised down its gross domestic product reading by 0.1 percent to a 1.6 percent annualized rate after factoring in slower-than-expected growth in consumer spending in the first quarter.
As of Thursday, the Federal Reserve Bank of Atlanta estimates that the economy continued to shrink in the second quarter, at an annualized rate of 1 percent, which would technically put the United States in a recession. (The National Bureau of Economic Research, the arbiter of U.S. recessions, however, considers a number of other factors, such as the unemployment rate, before declaring an official downturn.)
There has also been a marked shift in where Americans are spending their money. In recent months, they’ve stopped buying as many used cars and appliances and instead have begun shelling out more heavily on services like dining out, entertainment and travel. Indeed, Americans spent nearly $44 billion less on goods in May, but $76 billion more on services such as housing, utilities, international travel and hospital care.
But there are also signs that more families are beginning to rethink some of that spending. U.S. flight bookings dipped 2.3 percent in May from a month earlier, according to data from Adobe Analytics. And both high- and low-income Americans have begun pulling back, particularly on services, in the past four to six weeks, according to an analysis of credit card data by Barclays.
“Consumers are still spending, but we’re also seeing a shift where they’re saying, ‘We’re going to postpone our vacation,’ or ‘Maybe I don’t need to buy a new washing machine right away,’ ” said Quincy Krosby, a strategist for LPL Financial. “They are rethinking their consumption levels, and that’s because of higher gasoline prices, lodging and food prices.”
Fast-rising prices have become a defining challenge for the Biden administration. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures price index, remains near four-decade highs. A separate inflation benchmark, the widely used consumer price index, has shown that prices rose 8.6 percent in May compared with a year earlier.
The inflation benchmark PCE analyzes price changes of everyday goods, but places less importance on gas prices and housing costs than CPI does. Both inflation benchmarks show that everyday costs are soaring in a way that’s leading many Americans to pull back on certain types of spending.
Consumer sentiment fell to its lowest level ever in June, according to a closely watched survey by the University of Michigan, with nearly half of Americans saying inflation has eroded their living standards.
The stock market continued its months-long descent on Thursday, with all three major indexes falling by about 1 percent by lunchtime. The broad S&P 500 index is on track to close its worst first half of the year since 1970.