LIVE MARKETS-TGIF data: Consumer spending dipped in May, but sentiment rebounded in June

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TGIF DATA: CONSUMER SPENDING DIPPED IN MAY, BUT SENTIMENT REBOUNDED IN JUNE

Investors wrapped up a hot week hoping for some cool data to nudge Powell & Co closer to a July rate cut.

Did they get it? Not really.

Starting with the most highly anticipated economic release this week, the Commerce Department's wide-ranging Personal Consumption Expenditures (PCE) report USPCE=ECI offered a few surprises.

The PCE price index, Powell & Co's pet inflation yardstick, is a good place to start.

Prices rose by 0.1% last month, as expected and by 2.3% year-over-year, hitting the consensus bull's eye.

But stripping away volatile food and energy prices, core PCE rose on monthly and annual bases by 0.2% and 2.7%, respectively. Both numbers were 0.1 percentage points hotter than expected.

Taken together with the other three major inflation measures - wage growth, CPI and PPI - it can be said, to no one's surprise, that in May, price growth lumbered along that troublesome last mile down toward the Fed's average 2% inflation target.

"We are only just starting to see the impact of tariffs in consumer goods prices, and several favorable one-offs depressing inflation over the past few months will go into reverse from June onwards," writes Michael Pearce, deputy chief U.S. economist at Oxford Economics. "Despite the slowing economy, the upside risks to inflation will keep the Fed on the sidelines until much later in the year."

Other aspects of the report were downright disappointing.

Personal income unexpectedly dropped by 0.4% in defiance of the 0.3% increase economists predicted.

Consumer spending, the tent pole of the U.S. economy, also surprised to the downside by slipping 0.1%. Consensus called for a 0.1% increase.

"The contraction in consumer spending will raise eyebrows, but it was driven largely by an expected pullback in durable goods spending following the pull-forward in March," says OluSonola, head of U.S. economic research at Fitch Ratings. "The consumer is still hanging in there, but it is uncertain how much longer that will last. Tariff-related inflation was absent from this report, but that calm is likely fleeting, given the anticipated passthrough effects of tariffs."

Digging deeper, consumers pulled back their expenditures on goods, with durables and non-durables falling 1.8% and 0.2%, respectively. Outlays on services eked out a 0.1% increase.

Disposable income fell by 0.6%, which helped drag the saving rate - or the unspent portion of disposable income - down to 4.5% from 4.9%.

The saving rate is often viewed as a barometer of consumer anxiety.

Speaking of consumer anxiety, The University of Michigan's (UMich) second and final take on May consumer sentiment USUMSF=ECI was upwardly adjusted to 60.7 from its originally stated 60.5.

It's the highest final UMich reading since February and a solid rebound from the April and May numbers, which wallowed at near three-year lows.

Survey participants' assessment of present conditions improved by 10.0% from May. Near-term expectations surged 21.3% from the previous month's dire final reading.

Noting that the headline number "remains well below the post-election bounce seen in December 2024," Joanne Hsu, UMich's director of Consumer Surveys, adds "consumer views are still broadly consistent with an economic slowdown and an increase in inflation to come. Consumers continue to be concerned about the potential impact of tariffs."

While we're on the subject, the closely watched inflation expectations element was revised a bit lower from UMich's preliminary June reading released earlier in the month.

Respondents now expect price growth of 5.0% a year from now, cooler than the originally stated 5.1%, but 2.3 percentage points hotter than today's core PCE price index reading.

Longer-term, consumers' five-year inflation expectations shaved off 10 basis points to land at 4.1%.

Are consumers' inflation expectations accurate predictors of hard inflation data?

They are not.

But it's the psychological effect that high inflation expectations have on consumer behavior that concerns folks like Federal Reserve Chair Jerome Powell, as it has the potential to result in a self-fulfilling prophecy. The data shows that concerns about the inflationary impact of tariffs, while still very much on consumers' minds, are showing signs of abating.

(Stephen Culp)

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