2022 TOP TREND, DRAGFLATION: CONSUMER SPENDING GOING DOWN

U.S. consumer spending rose just 0.2 percent in June, year over year, the slowest pace this year, a third of May’s 0.6-percent gain, and half of the 0.4-percent growth analysts had expected.

The news follows the commerce department’s revised estimate that first-quarter consumer spending grew just 1.8 percent from the same period in 2021, not the 3.1 percent it had estimated earlier. (See “First-Quarter Consumer Spending Much Weaker Than Thought” in this issue.) 

Adjusted for inflation, June’s spending actually shrank 0.4 percent.

Consumer spending accounts for as much as 70 percent of the U.S. annual GDP.

“The decline in real consumer spending underscores that there is a limit to how much inflation U.S. consumers are willing and able to tolerate,” economist Lydia Boussour at Oxford Economics said to the Financial Times.

Personal incomes added 0.5 percent in May in dollar terms, but lost 0.1 percent in spending power when inflation and taxes were subtracted, The New York Times noted.

The weakened spending figure flipped some analysts’ expectations for the U.S. economy from growth to recession.

S&P Global Markets now projects that the economy contracted by 0.7 percent in the second quarter; the research service previously had expected a modest gain.

The Federal Reserve Bank of Atlanta’s benchmark GDPNow index indicates that the economy shrank 1 percent in the second quarter.

If the estimates accurately portray the economy’s direction, it would mean that the U.S. economy will have shrunk for two consecutive quarters, the definition of a recession.

Recessions are generally not formally acknowledged as such until one is declared by the private, nonprofit National Bureau of Economic Research.

The economy puckered by 1.6 percent in this year’s first quarter, the U.S. Bureau of Labor Statistics has reported.

The Personal Consumption Expenditures Price Index, the U.S. Federal Reserve’s preferred gauge of inflation, added 6.3 percent in May, year on year, holding April’s rate steady.

A silver lining: the core inflation index, which ignores energy and food prices, was 4.7 percent in May and has been lessening since February, when it was 5.3 percent.

The household savings rate improved slightly to 5.4 percent after falling in April to its lowest pace in more than 10 years.

However, the savings rate remains a fraction of the more than 30 percent it notched during the COVID War.

TREND FORECAST: The U.S. Federal Reserve’s campaign to raise interest rates has begun so late that it will not impact inflation in the short term. 

Consumers will be the ones to slow inflation: they are closing their wallets.

As demand falls, prices across a range of goods and services will fall to meet it.

However, inflation has left businesses little leeway to cut prices more than modestly.

As a result, the U.S. has entered a recession: the economy shrank 1.6 percent in this year’s first quarter and is now expected to have contracted again in the second quarter, as we reported above.

A recession is defined as two consecutive quarters of economic contraction.

However, rising prices and a contracting economy define our Top 2022 Trend of Dragflation, not merely a recession.

Barring a dramatic surprise, such as the end of the Ukraine war and the lifting of sanctions NATO and the United States imposed on Russia, the third quarter is unlikely to see a rebound and recession will set in around the world.