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Consumers kept spending in June even as they remained wary about future

New data show the tension in the economy, as consumers could be the deciding force in whether a recession occurs

Shoppers and pedestrians walk down Broadway in New York on July 28. Consumer spending slowed to a 1 percent annualized growth rate from 1.8 percent for the first quarter. (Victor J. Blue/Bloomberg News)

Consumer spending jumped in June as Americans continued to absorb stubbornly high prices on groceries, gasoline and other basic needs. But the mood of these shoppers remained quite gloomy, potentially signaling that a broad pullback could be on the horizon.

Two data points released Friday — in a week brimming with economic markers — illustrate how the behavior of American consumers has neared a tipping point heading into the second half of the year.

Overall consumer spending climbed a healthy 1.1 percent in June, the Bureau of Economic Analysis reported Friday, a significant uptick from the 0.2 percent recorded in May. That increase came during a month when gas prices surged past $5 per gallon in many parts of the country and the consumer sentiment index — as measured by the University of Michigan — reached a record low of 50.

U.S. economy shrinks again in second quarter, reviving recession fears

As gas prices receded somewhat in July, the consumer sentiment ticked up to 51.5, a marginal improvement but still the index’s second-lowest level. Whether this is the beginning of a slow rebound or a minuscule blip is unclear. When consumer sentiment is low, many Americans can be compelled to pull back on spending. That is the type of behavior that can pull an economy into a recession. And consumer sentiment hasn’t been this low in recent history, even during recessions.

Economic growth contracted in the first six months of the year but the robust labor market and consumer spending has continued to keep the economy from faltering so far.

Because consumer spending accounts for two-thirds of the U.S. economy, policymakers and economists have been closely watching for signs of a cool-down. To combat rising inflation, the Federal Reserve has been raising interest rates since March to dampen consumer demand. Multiple businesses are reporting a darker outlook in the months ahead, but so far many have not seen a sharp reversal in consumer spending. The data released Friday reflects that. Consumers keep spending, but the price increases are weighing on them and could soon lead to a change in behavior.

Neil Saunders, managing director of analytics company Global Data, said that while the 1.1 percent in spending “looks robust,” it’s almost wholly driven by inflation.

“So, essentially Americans are having to spend more to buy the same amount of stuff,” he said. “The increase in expenditure is also running well below the increase in income, which suggests that many households are having to dip into savings or take on debt to fund their spending.”

This imbalance isn’t sustainable, Saunders warned.

“We have already seem many discretionary categories, like apparel and electronics, slow down and today’s report suggests there could be a further slowdown on the cards,” he added.

Gas was the standout figure in the report’s spending breakdown, no surprise given that U.S. prices swelled to record highs in June, when the national average for a gallon of fuel breached $5 for the first time. Spending surged nearly 49 percent that month, after rising 20 percent in May.

Spending on clothing and footwear evened out in June, which could be attributed to back-to-school shopping. Still, the BEA’s numbers show that consumers are spending the most on housing, utilities, food and medical care.

Inflation explained: How prices took off

Counterintuitively, the report also shows that consumers spent more on recreational goods and vehicles. Spending jumped 1.3 percent in June, compared with the 9 percent decline registered in May. Motor vehicles and parts, which tumbled 53 percent in May, advanced 18 percent last month.

Mark Hamrick, senior economic analyst at Bankrate, said those numbers could be explained by supply and demand for both new and used vehicles over the past few months, in part thanks to shortages of semiconductor chips. The House on Thursday passed the $280 billion Chips and Science Act, which sets aside roughly $52 billion for domestic semiconductor manufacturing.

“Supply has yet to catch up for demand and might not until and if the semiconductor logjam is resolved,” Hamrick said. “Manufacturers have been raising prices, also in part, because of the increased complexity of technology associated with new vehicles. Over the horizon, the ability to raise prices may begin to wane, however, as more [electronic vehicles] come to market and if consumer demand weakens because of macro factors.”

On Wednesday, the central bank bumped up its benchmark rate by three-quarters of a percentage point — the fourth of seven expected increases this year — in an ongoing bid to contain inflation, which jumped 9.1 percent, year over year, in June. But there is also concern also that a more substantial consumer pullback could tip the economy into recession.

On Thursday, the BEA reported that gross domestic product fell for a second straight quarter, sliding at an annualized 0.9 percent from April to June. That follows the 1.6 percent decline in the three months ended March 31. Though six months of contraction is a typical indicator of a recession, the official determination is made by a panel of experts. Still, recessions aren’t typical when unemployment is near record lows at 3.6 percent. The Bureau of Labor Statistics reported that employers added 372,000 new positions last month.

Mixed messages on economy raises questions on recession risks

Some BEA categories showed signs of slower growth. Spending on food and beverages — which shot up 8.4 percent in May — advanced 3.6 percent in June, according to the BEA. Recreational services — such as concerts and sporting events tickets or gym memberships — also dropped, a signal that consumers may be retrenching to better afford necessities.

“Amid the mixes of high and sustained inflation, incomes and spending, consumers are clearly struggling,” Hamrick said. “Adjusted for inflation, spending is barely budging.

“With the savings rate slipping and at the lowest level in years, it is hard to see how consumers and households broadly can gain more traction or positive momentum. Ultimately, the salvation would be a broad decline in inflation,” he said.

Some retailers are feeling consumers’ changing spending habits. Walmart slashed its quarterly and full-year profit forecasts as shoppers forgo the clothing and technology aisles to afford groceries and gas. The nation’s largest retailer announced it was aggressively marking down merchandise to ease its inventory pileup — a warning sign that shook up Wall Street. Walmart’s stock tumbled 7.6 percent Tuesday, dragging down other major retailers like Target, Dollar Tree, Macy’s and Kohls.