High inflation might be putting the kibosh on a consumer spending binge — and threatening to derail the United States economy.
Household spending rose a meager 0.2% in May, government figures show, and outlays in the prior three months were weaker than originally reported.
After factoring in inflation, spending actually fell for the first time in six months.
The slowdown in spending this year, if it persists in June, could trigger a second straight decline in gross domestic product, the official scorecard for the economy.
Consumer spending accounts for about 70% of what goes on in the economy.
One of Wall Street’s premier forecasting firms, IHS Markit, cut its forecast for second-quarter GDP to -0.7% from 0.1% after the report on consumer spending. Several other Wall Street
firms also dropped their estimates into negative territory.
GDP contracted by 1.6% in the first quarter, the first decline since the onset of the pandemic in 2020.
Typically two straight quarters of negative GDP is seen as a recession. But the group that makes such pronouncements in the U.S. might not choose to do so.
The National Bureau of Economic Research also takes into account other critical factors such as the health of the labor market.
For now the labor market is a big plus for the economy.
The U.S. unemployment rate stood near a 54-year low of 3.6% in May. Layoffs were at a record low. And job openings were near an all-time high. The biggest complaint among businesses is that they cannot find enough people with the skills they need to hire.
“Demand for labor remains quite strong,” said Thomas Simons, money market economist at Jefferies LLC.
So long as most Americans are working and feel secure in their jobs, analysts say, they are likely to spend enough to keep the economy growing. Recessions basically never take place without a big drop in spending, falling business orders and a sharp rise in unemployment.
For now, most forecasters are still predicting a small increase in economic growth in the second quarter. There’s still a handful of key reports, including U.S. job gains in June, that could ultimately swing GDP back into positive territory.
Looking further out, the odds of recession are rising.
“A recession in 2022 is unlikely give the strong labor market, but the risk of recession over the next few years is about 40%, about double what is was prior to the Russian invasion of Ukraine,” said Gus Faucher, chief economist of PNC Financial Services.
The Ukraine conflict sent already soaring gas prices even higher and pushed up the cost of grains such as wheat and corn, exacerbating inflation in the United States and around the world.
With inflation running at a 40-year high of 8.6%, the Fed is being forced to raise interest rates even higher than it planned to try to relieve price pressures.
Higher borrowing costs usually dampen demand and slow the economy. If they go high enough, the United States. could even sink into recession..