Key indicators of the health of the United States economy showed a chilling lack of vigor in the month of May. Consumer spending, a key pillar of economic expansion, dropped sharply. On Friday, the Commerce Department issued data that consumer spending fell by 0.1% in May. This decrease is a stark reversal to the 0.2% increase that was reported in April. Economists had predicted an increase of 0.3% month-on-month, signaling a worrying trend in the mood of consumers.
We know that consumer spending has eyed toward a pretty sharp slowing down, and that’s worrying. Yet it constitutes two-thirds of the country’s economic growth. The drop could be indicative of increasing consumer anxiety during a time of heightened trade conflict. President Donald Trump’s sharp escalation of tariffs on imported goods has ignited a trade war, which many economists fear could further dampen consumer confidence and spending.
Inflation data published alongside the consumer spending data showed a much faster rise in prices. In May, prices increased 0.1% from April. The monthly gain was unchanged from April, excluding new estimates of previous months’ jobs. Alas, annual inflation has jumped up, raising concern about increasing prices to consumers. As costs keep going up, consumers will have to be increasingly careful in how they spend their dollars.
The increasing interdependence between consumer spending and the trade war makes the current economic climate even more difficult to navigate. Economists are watching these developments anxiously, as a significant decline in consumer spending would likely trigger a wider economic recession.
May’s surprising plunge in consumer spending adds further uncertainty to how well the economy will perform in the coming months. Together with a trade war, this will likely lead to an environment in which consumer confidence is deeply shaken. Consumers have begun to tighten their own budgets. This change would be damaging to businesses and could even adversely impact future hiring and investment.