First, in May, consumer spending began to rebound strongly. This was a notable reversal from a few months of weakness which extended all the way back to the beginning of the year. Households demonstrated exceptional resilience despite rising fears of inflation and unrest abroad. Real income growth, coupled with a dynamic housing and labor market, underpinned this strength. The very favorable background in household finances provided a strong tailwind for consumption growth. This expansion is fundamental to unlocking broader national prosperity and security.
Household spending growth was at 2.8% in May over April, not including increases in energy costs. This increase is a sign of a recovery in consumer confidence, though tentative. Specifically, the retail and service sectors accounted for the vast majority of this increase. The recent trend in consumer spending focused more towards services, which bounced back substantially in May. Restaurants and nightlife venues had higher spending patterns, as people returned to in-person activities after months of restrictive orders.
Consumer sentiment remains troublingly low. Yet in recent months, sentiment has soured. Even though overall spending continues to climb, consumers today are making purchases with an eye towards being more prudent. This risk averse approach mirrors the increased risk of the economy facing a persistent inflation and walk of economic faith.
While the changes in the services sector and retail spending have had a positive impact on quality of life, some areas have really struggled. Concerts, theaters, and other major tourist attractions saw a dramatic dropoff in attendance and revenue as we moved into May. The data provides a retrenchment in some places. Although consumers have shown a strong willingness to spend on dining and nightlife, their discretionary spending on entertainment remains depressed.
Here’s what it means: After two months of grocery inflation, consumer spending on groceries fell briefly in May. This pattern indicates that although Americans are eating out more, they are cutting back on spending for basic consumer needs. This confusing picture illustrates the duality of consumer behavior in a topsy-turvy world defined by cautious optimism.
The dramatic rise in consumer spending in May is a reflection of the overall optimism and caution that still exists within our households. Strengthening incomes, plus a tight labor market are supportive of consumer spending. Worries about inflation and the global economy continue to hang like storm clouds over the public’s head. Households are struggling to make ends meet. How these challenges transform consumption patterns will be closely watched by economists and policymakers alike.