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WASHINGTON — U.S. consumer spending rose less than expected in May as motor vehicles remained scarce while higher prices forced cutbacks on purchases of other goods, another sign that the rebound in economic growth early in the second quarter was losing steam.
Though the report from the Commerce Department on Thursday suggested inflation had probably peaked, price pressures remained strong enough to keep the Federal Reserve on its aggressive monetary policy tightening path. Nevertheless, cooling demand will likely be welcomed by Fed officials.
Rising interest rates and tight financial conditions are stoking fears of a recession, but overall economic data so far point to moderate growth. New claims for unemployment benefits continued to grind lower last week, despite layoffs in technology and housing sectors, other data showed on Thursday.
"The Fed hasn't won the war on inflation just yet, but there are somewhat encouraging signs that the economy is slowing down," said Christopher Rupkey, chief economist at FWDBONDS in New York. "Despite the market's recession fears, job layoffs have not quite reached high enough levels to make the call that the economy is headed over the cliff into the depths of recession."
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, gained 0.2% last month, the smallest rise in five months. Data for April was revised down to show outlays increasing 0.6% instead of 0.9% as previously reported.
Spending on goods meant to last three years or more declined 3.2%, pulled down by motor vehicles. There were also decreases in purchases of furnishings and durable household equipment as well as recreational goods and vehicles. That partially offset a 0.7% increase in services, which was driven by housing and utilities, health care and international travel.
Economists polled by Reuters had forecast consumer spending would climb 0.4%. The report joined data on housing starts, building permits and manufacturing production in suggesting that the economy was struggling to gain altitude after gross domestic product dropped at an annualized 1.6% rate in the first quarter.
A record trade deficit largely accounted for the first decline in GDP since the short and sharp COVID-19 pandemic recession nearly two years ago. Though the trade gap narrowed in the first two months of the second quarter, slowing consumer spending is causing unsold goods to pile up.
The Commerce Department on Wednesday sharply revised higher the pace of inventory accumulation in the January-March quarter, with stockpiles building up at general merchandise stores.
The U.S. central bank this month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994. The Fed has increased its benchmark overnight interest rate by 150 basis points since March.
Inflation maintained its upward trend in May. The personal consumption expenditures (PCE) price index rose 0.6% last month after gaining 0.2% in April. In the 12 months through May, the PCE price index climbed 6.3% after advancing by the same margin in April. It was driven by higher prices for goods and services.
But underlying price pressures are starting to abate, though still strong. Excluding the volatile food and energy components, the PCE price index rose 0.3% for the fourth straight month.
The so-called core PCE price index gained 4.7% on a year-on-year basis in May, the smallest increase since last November, after rising 4.9% in April.
Consumer spending continues to be supported by a tight labor market. Wages increased 0.5% in May, contributing to the 0.5% rise in personal income.
Though job growth is slowing, demand for labor remains strong, with 11.4 million job openings at the end of April.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 231,000 for the week ended June 25.
Economists had forecast 228,000 applications for the latest week. Claims have been stuck in a tight range since tumbling to more than a 53-year low of 166,000 in March. The number of people receiving benefits after an initial week of aid fell 3,000 to 1.328 million during the week ending June 18.