May experienced another weak period for consumer spending, reflecting the ongoing impact of deteriorating economic conditions on American households.

Retail Report

Recent data shows that retail sales in May saw a slight 0.1% increase after a 0.2% decline in April. Among the 13 tracked categories, five experienced declines, influenced by lower gasoline prices and Memorial Day discounts at furniture stores. This data points to a slowdown in consumer spending, which economists attribute to ongoing inflation, a cooling job market, and signs of financial strain.

Consumer Behavior

Paul Ashworth of Capital Economics noted that reduced consumption of services and declining consumer confidence suggest that households are more impacted by higher interest rates than previously assumed. Nonetheless, Federal Reserve Chair Jerome Powell stated that consumer spending remains robust and that households are in “pretty good shape.”

Economic Indicators

Treasury yields fell as the retail sales report indicated economic softening. The control-group sales, which are used to calculate GDP, increased by 0.4% in May following a 0.5% decline in April. This led Morgan Stanley and Oxford Economics to revise their GDP growth forecast for Q2 downward.

Goods vs. Services

Retail figures primarily reflect goods purchases, which constitute a small portion of overall consumer spending. Notably, spending at restaurants and bars decreased by 0.4%, marking the largest decline since January and suggesting tighter consumer budgets.

The Takeaway

Lower-income consumers are cutting back on spending as their pandemic savings dwindle, and more people are missing credit card and car payments. While this slowdown might aid the Federal Reserve in controlling inflation, it also risks triggering a deeper, more challenging economic downturn.