Income and Spending Rose Less Than Prices in May

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Americans’ income and spending failed to keep pace with rising prices in May, the latest sign that the fastest inflation in a generation is chipping away at the bedrock of the economic recovery.

Consumer spending, adjusted for inflation, fell for the first time this year, declining 0.4 percent from April, the Commerce Department said Thursday. In addition, spending rose more slowly in the first four months of the year than previously reported, the government said, and after-tax income, adjusted for inflation, fell slightly.

The report offered new evidence that the U.S. economy hangs in a delicate balance as the Federal Reserve tries to bring inflation under control. Policymakers want to cool off consumer demand for goods and services, which has outstripped supply, driving up prices. But if the central bank chokes off demand aggressively when prices are already crimping consumption, it could cause a recession.

Consumers have hardly stopped spending. Overall demand remains strong, particularly for vacation travel, restaurant meals and other services that many families avoided earlier in the pandemic.

Until recently, there was little sign that consumers’ dour mood was affecting their spending much. But that may be starting to change. Consumer spending, not adjusted for inflation, rose 0.2 percent in May, the weakest gain this year, and spending on goods, where price increases have been fastest, fell.

In other areas, consumers are spending more but getting less: Households bought almost exactly the same amount of gasoline in May as in April, for example, but paid 4 percent more for it.

Tim Trull put $35 worth of gas in his truck one recent Friday, and was on empty again after a weekend trip to visit his parents 30 miles away. So he is looking for other places to cut back. Trips to the grocery store have become a dull routine: bread, cheese, eggs, milk, whatever lunch meat is on sale. Mr. Trull said he no longer even walked down the meat aisle.

“I like my Raisin Bran, but I can’t even buy Raisin Bran,” he said. “Raisin Bran’s almost $7 a box right now.”

Mr. Trull, 51, got a 50-cent-an-hour raise at Christmas, but inflation has more than wiped that out — especially because the furniture plant where he works in Hickory, N.C., has begun cutting back on overtime. Now, with talk of a recession, he is worried about losing his job.

“I just have some bad feelings that eventually it’ll peter off and they’ll start laying people off again,” he said. “Who’s going to buy furniture when you’re deciding gas, food or a new love seat?”

Stories like Mr. Trull’s highlight the risk facing the economy if the job market slows. Despite the dip in May, Americans’ income, in the aggregate, has mostly kept up with inflation thanks to rising wages and strong job growth.

The job market is likely to cool in coming months, however, as the Fed raises interest rates in an effort to tame inflation. Weaker wage growth and slower job gains — or, worse, outright job losses — would dent income growth and may make people more reluctant to dip into their savings. That could make a recession more likely.

“If we start to see that slowdown in job growth, if we start to see some slowdown in wage growth, if we start to see a pickup in jobless claims, then I think the story really does start to shift,” said Michelle Meyer, the chief U.S. economist for the Mastercard Economics Institute.

U.S. households also built up trillions of dollars in savings during the pandemic, in part because of government aid. Those savings could, at least in theory, help consumers keep spending even if their incomes fall further behind inflation. Households are already saving less in order to keep spending: Americans saved 5.4 percent of their after-tax income in May, up slightly from April but below the roughly 7 percent rate in the years before the pandemic.

But families may be reluctant to dig too deep into their rainy-day funds if they are worried about a possible recession, said Pablo Villanueva, senior U.S. economist for UBS.

“The last few months, the consumer has started to rely more on a lower savings rate to finance consumption, and that can only go on for so long, particularly in the context of very weak consumer confidence,” he said.

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