Consumer spending slows as Americans reel from record high prices

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By Matthew Rusling, Xinhua News

1st July 2022 – (Washington)  Consumer spending dropped in May amid the worst inflation in 40 years and record-high gasoline prices, casting shadow for the U.S. economy.

The personal consumption expenditures index (PCE), a key measure of consumer spending closely watched by the U.S. Federal Reserve, increased 0.2 percent in May — a slowdown from the previous month’s rise, according to the U.S. Bureau of Economic Analysis.

Inflation-adjusted consumer spending, however, dropped 0.4 percent, the report showed.

That’s because the worst inflation in 40 years and record-high gasoline prices have made Americans more careful about how they spend their money, analysts say.

While incomes climbed last month, inflation is still rising faster than incomes, and has put a sting in Americans’ wallets.

Indeed, the cost of food has surged. Average U.S. rent has spiked more than 30 percent of the national median income when taxes are accounted for, according to a report from Moody’s Analytics released Wednesday.

Some economists said the economy will be determined by consumers in the next 12 months. If Americans continue to spend, that can prevent companies from laying off employees and sparking a recession.

In sharp contrast, if consumers reduce spending to a certain point, that could spell trouble for the overall U.S. economy.

Still, some analysts expressed optimism.

“The reality is I think inflation is slowing, and nominal spending is really very strong, and wages are still fairly decent. Wages and salaries combined with the level of employment we’re generating is generating a lot of income, nominal,” James Paulsen, chief investment strategist of The Leuthold Group, a U.S. investment research firm, told Xinhua.

“So if inflation is moderating, which it is, then real spending numbers are likely to increase,” Paulsen said.

“Just as when inflation came up, it reduced real spending. If it now moderates, real spending is going to look better again,” Paulsen said.

OVERALL STATE OF U.S. ECONOMY

There remains no overall consensus on the state of the economy, with many economists expressing pessimism and others remaining upbeat.

Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua he foresees a recession and a rise in jobless numbers, Lachman said.

Famed investor Cathie Wood earlier this week told CNBC the United States is already in a recession, a point echoed by Jeremy Siegel, professor at The Wharton School of the University of Pennsylvania, in a separate interview.

But Dean Baker, senior economist at the Center for Economic and Policy Research, told Xinhua the current economic picture is “overwhelmingly positive.”

“Unemployment is near 50-year low. Tens of millions of workers are able to quit jobs they don’t like. That is huge. I expect inflation to come down sharply in the months ahead, as the supply chain problems are being resolved,” Baker said.

“In terms of people outspending their income. If we pull out capital gains taxes, saving rates are actually higher than their pre-pandemic level,” Baker said.

The U.S. economy shrank at an annual rate of 1.6 percent in the first quarter in the third and final estimate, the U.S. Commerce Department reported Wednesday.

According to the Atlanta Federal Reserve’s GDPNow model updated on Thursday, the U.S. GDP is estimated to contract at a seasonally adjusted annual rate of 1.0 percent in the second quarter.

With first-quarter contraction, a second consecutive quarter of negative growth would meet the definition of a recession.

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