skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

30 June 2022
Consumer Spending Decelerates to a Crawl Amid Rising Prices
By Michael J. Bazdarich, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Consumer spending rose 0.2% in May, alongside 0.5% increases in all three major measures of household income (total personal income, disposable personal income, and private-sector wage and salary income). These gains were, of course, eclipsed by inflation, with the Personal Consumption Expenditures (PCE) price index showing a 0.6% increase and the core PCE index—the Federal Reserve’s (Fed) inflation measure of choice—showing a 0.3% rise. So, adjusting for inflation, real consumer spending declined by 0.4% in May, while real income measures declined by 0.1%.

Real incomes have been declining ever since inflation reared higher again last October. However, recent months’ declines have moderated, as good job growth has continued, and PCE inflation has moderated a bit from the October-February pace. Still, even over the last three months, real incomes are down slightly.

In line with the downshift in incomes, real consumer spending has gone flat. Over the seven months since October, real consumer spending has risen at only a 0.06% annualized rate, indistinguishable in the chart from a flatline (zero growth) trend.

We should point out that today’s data featured substantial downward revisions to consumer spending estimates all the way back to January. Goods spending has already been on a declining trend since March 2021. The revised data showed more pronounced declines in goods consumption over the first five months of 2022. Services spending had shown strong 6.9% growth in early-2022, thanks to ongoing recovery from Covid restrictions in various service sectors. The revisions chop that down to 4.3% through May, still respectable, but barely enough to offset the declines in goods spending.

Exhibit 1: Total Real Consumer Spending
Total Real Consumer Spending
Source: Bureau of Economic Analysis. As of 31 May 22. Select the image to expand the view.

While various analysts had proclaimed a strong consumer rebound in this expansion, we have regularly pointed out that even at its zenith last October, consumer spending had merely rebounded to pre-Covid trends. Over the last seven months, the consumer has pulled back noticeably from those pre-Covid trends.

We should concede that spending has not softened as much as incomes. Thus, despite a 3.6% annualized rate of decline in real disposable income since last October, real consumer spending has managed that 0.06% rate of increase. In other words, consumers have dipped into their savings to cope with higher prices. With the downward revisions to consumption, saving data were revised up, but not enough to completely erase this “dipping into.”

Contrary to others’ opinions, we would expect saving rates to return to their pre-Covid norms of 7.3% (from recent rates just above 5%) as consumers adapt their lifestyles and spending habits to new realities. So, unless job growth suddenly accelerates or inflation suddenly ebbs, real consumer spending is likely to decelerate further in months to come. To this end, we could add that the 0.3% reading on core PCE inflation in May was substantially lower than the 0.6% May rate shown by the core CPI.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.