US Issues Successive Consumer Slowdown Warnings... Growing Recession Concerns

May Personal Consumption Growth Rate Hits This Year's Low... Q2 GDP Also Expected to Decline

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] Signs are emerging that consumer spending, which accounts for 70% of the US Gross Domestic Product (GDP), is slowing down. As consumers tighten their wallets, concerns are growing that the US economy is already in a recession phase.

According to the Wall Street Journal (WSJ) on the 30th of last month (local time), the US Department of Commerce announced that personal consumption in the US increased by 0.2% in May compared to the previous month. This was a slowdown from the 0.6% increase in April and marked the lowest growth rate this year.

Real personal consumption, adjusted for inflation, recorded a 0.4% decrease. This is the first decline in real personal consumption this year.

Earlier, the Department of Commerce reported on the 15th of last month that retail sales in May decreased by 0.3% compared to the previous month, marking the first decline this year. This result defied market expectations, which had anticipated a 0.1% increase.

According to Black Box Intelligence, a food service market research firm, the number of dinner guests at restaurants over the three months ending on the 12th of last month decreased by 3% compared to the same period last year.

The slowdown in consumer spending has also heightened concerns about a US economic recession. Lindsay Piegza, chief economist at Stifel Financial, said, "There are clear signs that consumer spending, the backbone of the US economy, is slowing down," adding, "The US economy will not be able to avoid a short-term recession."

After reviewing the May personal consumption data, S&P Global Market Intelligence lowered its forecast for US GDP in the second quarter of this year to an annualized decline of 1.5%. S&P has revised its GDP forecast downward twice this week alone.

The GDPNow economic forecasting model from the Federal Reserve Bank of Atlanta also expects the second-quarter GDP to decline by 1% on an annualized basis.

Since the US GDP decreased by 1.6% in the first quarter, this would mean two consecutive quarters of GDP decline. WSJ noted that typically, two consecutive quarters of GDP decline are considered a recession, but added that the official determination of a US economic recession is made by the National Bureau of Economic Research (NBER).

Tavis McQuade, investment strategist at Raymond James, recently pointed out the slowdown in the savings rate. He said, "Consumers are still spending more than usual, but not because their income is higher than normal, but because they have a lot of savings," adding, "The problem is that most of the excess savings will be used up by Labor Day."

The US government implemented large-scale fiscal stimulus measures after COVID-19, and American consumers, who were unable to engage in outdoor activities due to COVID-19 restrictions at the time, significantly increased their savings. Currently, Americans are using the increased savings from that period to fuel consumption, but it is expected that by Labor Day on September 5 this year, their spending capacity will be exhausted.

As consumer spending slows, inflationary pressures are also easing. The Personal Consumption Expenditures (PCE) price index for May rose 6.3% year-over-year, maintaining the same rate of increase as in April. This was lower than the 6.4% increase expected by economists surveyed by Bloomberg.

The core PCE price index, which excludes the volatile energy and food categories, rose 4.7%, the lowest since November last year. The core PCE price index has been on a downward trend since peaking at 5.3% in February. However, it still remains well above the Federal Reserve's monetary policy target of 2%, so inflationary pressures remain a concern.

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