Consumer staying power running out

Wells Fargo Research Team Wells Fargo

Summary

Yesterday's GDP revisions that lowered estimates for first quarter consumer spending was just a jab; today's May personal income and spending report was the uppercut. Real consumer spending dropped 0.4% in May and prior monthly spending figures were revised lower. At least inflation did not get materially worse; the headline PCE deflator rose less than expected to 6.35%.

Turn on a dime, or should we say a quarter now?

Real consumer spending fell 0.4% in May. Was it all a dream? Just a few days ago the latest published figures on personal spending revealed a consumer with uncanny staying power despite the highest gas prices ever and the fastest inflation in 40 years. Yesterday's GDP report revised lower the growth rate in consumer spending to 1.8% from 3.1% previously. Today's details on monthly spending figures shows a much weaker profile for spending in the first five months of the year and sets us up for weaker growth in the second quarter than the data would have suggested just 48 hours ago.

There is not much that is good about today's report, but something that is at least “less bad” is that the PCE deflator rose “just” 0.6% in May which only marginally lifted the year-over-year rate of inflation to 6.35% from 6.29% previously. The core PCE deflator was expected to slow in May, and it did, in fact it fell more than expected to a 4.7% year-ago rate in May from 4.9% in April. Policymakers at the Federal Reserve and financial markets alike may be heartened at these signs the fever may be starting to breaking for inflation, but our latest forecast says that we are not out of the woods yet. Volatile food and energy prices still have scope to drive inflation higher and chip away at real consumer spending power.

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Wells Fargo Research Team

Wells Fargo

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