Spending showed signs of stalling out in the first six months of the year, with hard data showing further deceleration in personal consumption expenditures as hiring and wage growth slowed and inflation crept higher.
Nevertheless, we expect a 0.3% increase in personal spending in June when the data is released Thursday as consumers increase outlays following the 0.1% decline in May.
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This should be sufficient to provide a soft 1.5% increase in household consumption inside the gross domestic product data for the second quarter, which will be released Wednesday.
Personal consumption expenditures in real, or inflation-adjusted, terms have been decelerating for some time, and the recent increase in inflation has not been conducive to supporting higher household spending.
In the 22 months from April 2021 to February 2023, real personal consumption expenditures increased at an average rate of 8.7% per year. In the following 22 months, through this past December, PCE growth slowed to a 5.4% yearly rate. That was to be expected following the distortions of the pandemic era.
Rational consumers, given rising taxes on imports, should react by reducing expenses. One can observe this in the sharp drop in the growth rate of personal consumption expenditures after last December.
In the first five months of this year, personal expenditures growth decelerated to a 2.2% annualized rate following the torrid 4.2% to close out last year.
The takeaway
Ancillary evidence of a spending pullback continues to pile up. Existing home sales are down. Car sales are weak. Average weekly hours are down slightly. The labor pool is shrinking. An increased fiscal imbalance will increase the cost of capital.
With prices continuing to creep higher and with consumers becoming more cautious, expenditures could very well end up flat in the first half of the year.
At some point, the inventory buildup will have dissipated, product substitution for consumers will have reached its limit, and firms will have to choose between keeping market share and maintaining margins.
We think that corporate profit margins in the second half of the year will thin notably and that hiring will continue to slow, which is not conducive to wage and spending growth.
