U.S. Slouches Toward Recession as Inflation Drags Down Income and Spending in May
Inflation took a bite out of the incomes of Americans in May and crimped consumer spending as households struggled to make ends meet, raising the prospects of a second consecutive economic contraction in the second quarter.
Personal income after taxes was up a sizeable 0.5 percent in May. After adjusting for inflation, however, personal income fell 0.1 percent. Personal income fell on a monthly basis in three out of the first five months of the year.
Compared with a year ago, after-tax, inflation-adjusted income was down 3.3 percent. This measure has declined every month this year but the early declines on an annual basis largely reflected a distortion caused by a surge in income thanks to stimulus payments and other government programs in the first half of last year.
Consumer spending climbed 0.2 percent from April before adjusting for inflation. After inflation, however, spending fell 0.4 percent, the first monthly decline since November of last year.
The new numbers, from the Commerce Department’s Personal Consumption Expenditure report, indicate that U.S. households are struggling to keep up with the rapid price increases that have inflicted the economy and sent the Federal Reserve scrambling to raise rates at a pace unprecedented in this century.
The Atlanta Fed’s GDPNOW tracker, which indicates what recent economic data imply for current economic growth but does not attempt to forecast growth based on unreleased data, indicates the economy is shrinking at a percent rate in the second quarter. The economy shrank 1.6 percent in the first quarter. As a rule of thumb, two consecutive quarters of economic contraction are considered a recession, although the official declaration of when recessions begin and end comes from an obscure committee of economists affiliated with a private organization called the National Bureau of Economic Research and is based on more complex, subjective, and less transparent analysis.
Spending on durable goods, which had been strong through much of the pandemic and lockdowns, fell 3.5 percent in May after adjustment for inflation. This had been up 1.5 percent in April and flat in March. Back in January, this surged 6.7 percent after a disappointing December holiday shopping season followed a surge of buying in October as consumers sought to avoid feared shortages and completed much of the gift purchases early. Compared with a year ago, inflation-adjusted spending on durables was down 5.6 percent. Prices of durable goods are up 6.6 percent from a year ago after a rise of 0.3 percent in May, according to the Commerce Department’s price index.
Spending on nondurable goods fell 0.6 percent after inflation. Food prices, included in nondurable goods, were up 11 percent in May and prices for nondurables overall were up 11.4 percent, according to the Commerce Department’s price index. Prices rose 1.2 percent for the month. Compared with a year ago, inflation-adjusted spending on nondurables was down one percent and prices were up 11.4 percent.
There’s been a shift in spending toward services from goods as Americans have been returning to in-office work, eating out more, traveling more, and increasing other in-person activities. This shift, however, has fallen short of the expectations of many economists and failed to rise enough to fully offset the decline in goods spending. After inflation, spending on goods rose 0.3 percent and has been up for six consecutive months. Prices of services rose 0.4 percent in May. Compared with a year ago, spending on services is up 4.7 percent after inflation and prices are up 11.4 percent.
On Wednesday, the government reported that spending on goods and services rose an annualized 1.8 percent in the first quarter, a big downward revision from the 3.1 percent pace in the previous estimate. This suggested that the consumer was already wavering under the pressure of inflation. Overall gross domestic product was revised to show an annualized decline of 1.6 percent in the first quarter, worse than the 1.5 percent decline reported in last month’s revision and the 1.4 percent in the preliminary report.
Inflation has slammed consumers’ sense of financial well-being and confidence in the economy. The University of Michigan’s widely followed survey of consumer sentiment produced its lowest reading on record in June. A Gallup Poll taken in June showed that 54 percent of Americans say economic conditions are poor—the highest share since 2009—and 85 percent say the economy is getting worse. These are not outliers: AP-NORC poll showed that 79 percent say the economy is in poor condition. Fifty-eight percent of Americans say we are already in a recession.
This sense of financial distress has been exacerbated by the limp responses from the Biden administration and the delayed reaction of the Federal Reserve. As well, both the administration and the Fed misdiagnosed inflation as transitory, shaking public faith in their ability to understand the economy or remedy its ills.