High inflation could be putting the kibosh in a binge of consumer spending and threatening to derail the U.S. economy.
Government figures show that household spending rose minus 0.2% in May, and spending in the previous three months was weaker than initially reported.
After taking inflation into account, spending fell for the first time in six months.
This year’s slowdown in spending, if it persists in June, could lead to a second consecutive drop in gross domestic product, the economy’s official scorecard.
Consumer spending accounts for about 70% of what happens in the economy.
One of Wall Street’s leading forecasting companies, IHS Markit, cut its second-quarter GDP forecast to -0.7% from 0.1% after the consumer spending report. Several other Wall Street DJIA,
companies also lowered their estimates in negative territory.
GDP contracted by 1.6% in the first quarter, the first decline since the start of the pandemic in 2020.
Typically, two consecutive quarters of negative GDP are seen as a recession. But the group making those statements 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 labor market health.
At the moment, the labor market is a great advantage for the economy.
The U.S. unemployment rate stood near the 54-year low of 3.6% in May. The layoffs were at an all-time low. And job offers were almost a record high. The biggest complaint among companies is that they don’t find enough people with the skills they need to hire.
“Demand for labor is still quite strong,” said Thomas Simons, a money market economist at Jefferies LLC.
As long as most Americans work and feel secure in their jobs, analysts say, they are likely to spend enough to keep the economy growing. Basically, recessions never occur without a large drop in spending, falling business orders and a sharp rise in unemployment.
For now, most forecasters still forecast a small increase in economic growth in the second quarter. There are still a handful of key reports, including earnings in the United States in June, that could eventually return GDP to positive territory.
Looking further, the odds of recession increase.
“A recession in 2022 is unlikely to have a strong labor market, but the risk of recession over the next few years is 40%, about twice what it was before the Russian invasion of Ukraine,” he said. Gus Faucher, chief economist at PNC. Financial services.
The conflict in Ukraine further increased gas prices and increased the cost of grains such as wheat and corn, exacerbating inflation in the United States and around the world.
With inflation at a 40-year high of 8.6%, the Fed is being forced to raise interest rates even more than it had anticipated in an attempt to ease price pressures.
Higher borrowing costs often slow down demand and slow down the economy. If they go high enough, the United States. it could even sink into recession …