*

Consumer spending falls 0.1% in May; second decline in

2025

*

Core PCE inflation rises 0.2%; up 2.7% on year-over-year

basis

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Income drops 0.4% as lift from some retroactive Social

Security

payments wanes

By Lucia Mutikani

WASHINGTON, June 27 (Reuters) - U.S. consumer spending

unexpectedly fell in May as the boost from the pre-emptive

buying of goods like motor vehicles ahead of the Trump

administration's tariffs faded, while monthly inflation

maintained a moderate pace of increase.

The Commerce Department's report on Friday likely will have no

impact on near-term monetary policy as Federal Reserve Chair

Jerome Powell told lawmakers this week that the U.S. central

bank needed more time to gauge the impact of the import duties

on prices before considering a resumption of interest rate cuts.

Business surveys have suggested tariffs could start driving up

prices this summer, a sentiment shared by Powell and most

economists. President Donald Trump's sweeping tariffs, which

have led businesses and households to front-run imports and

goods purchases to avoid higher prices from duties, have muddled

the economic picture, and the spending report offers no clarity.

"The report is a wash for the Fed and won't alter its

wait-and-see stance," said Sal Guatieri, a senior economist at

BMO Capital Markets. "The pullback in spending in May partly

reflects payback from earlier tariff front-running, while the

slightly warmer core price increase doesn't settle the debate

about how much tariffs will impact inflation."

Consumer spending, which accounts for more than two-thirds

of economic activity, dropped 0.1% last month after an unrevised

0.2% gain in April, the Commerce Department's Bureau of Economic

Analysis said. That was the second decline in consumer spending

this year. Economists polled by Reuters had forecast consumer

spending would edge up 0.1%.

Goods spending dropped 0.8% amid a 1.8% decline in outlays of

long-lasting manufactured goods, mostly motor vehicles. Spending

on nondurable goods like gasoline and food also fell, with the

former reflecting lower prices at the pump.

Consumer spending on services ticked up 0.1%, the smallest gain

since November 2020. Services outlays were restrained by

decreases in spending on hotel and motel accommodation as well

as at restaurants and bars.

There were also decreases in spending on financial services

and insurance and transportation services. But households spent

more on housing and utilities as well as healthcare.

The sharp slowdown in services outlays aligned with soft

consumer sentiment and indicated that households were pulling

back on discretionary spending.

A survey from the University of Michigan showed consumer

sentiment in June remained about 18% below its peak in December,

when optimism surged following Trump's election victory. The

University of Michigan said "consumer views are still broadly

consistent with an economic slowdown and an increase in

inflation to come."

Stocks on Wall Street gained, with the benchmark S&P 500

and the tech-heavy Nasdaq Composite indexes

touching intraday record highs as investors bet on deeper Fed

rate cuts. The dollar hit a fresh three-and-a-half-year low

against the euro. Yields on shorter-duration U.S. Treasury notes

rose.

Consumer spending nearly braked last quarter after being

propelled by households pulling forward goods purchases.

Households also spent less on services last quarter, helping to

restrain growth in consumer spending to only a 0.5% annualized

pace, the slowest rate since the second quarter of 2020.

A record goods trade deficit in the first quarter, thanks to a

deluge of imports, accounted for much of the 0.5% rate of

decline in gross domestic product during that period.

The trade gap has since contracted significantly, setting up

growth for a sharp rebound this quarter. But the anticipated

boost to GDP is likely to be blunted by the soft consumer

spending, which fell 0.3% when adjusted for inflation last month

after nudging up 0.1% in April.

SOLID WAGE GAINS

The Atlanta Fed cut its GDP growth estimate for the second

quarter to a rate of 2.9% from the previously projected 3.4%

pace. The expected rebound in growth this quarter will not be a

sign of economic strength given the wild swings in trade.

Economists warned it could take time for the tariff-related

distortions to wash out of the economic data. Despite the

weakness, an imminent collapse in spending is unlikely as wages

increased by a solid 0.4% last month.

But personal income dropped 0.4%, the largest decrease

since September 2021, as the lift from retroactive Social

Security payments to some retirees who draw public pensions -

such as former police officers and firefighters - waned. The

saving rate fell to 4.5% from 4.9% in April.

"The saving rate is still close in line with its average

over the past few years, underlining that consumers are not

pulling back sharply on their spending," said Michael Pearce,

deputy chief U.S. economist at Oxford Economics.

The Personal Consumption Expenditures (PCE) Price Index

gained 0.1% in May, matching the rise in April, the BEA said. It

was curbed by a sharp decline in gasoline prices, which

partially offset higher costs for furnishings and durable

household equipment. Overall goods prices climbed 0.1%.

The cost of services rose 0.2%, driven by housing and utilities,

food services and accommodations. But the costs of financial

services and insurance decreased.

In the 12 months through May, PCE inflation increased 2.3%

after climbing 2.2% in April.

Most economists argue price increases have remained moderate

because businesses are still selling inventory accumulated

before the tariffs went into effect. They expect inflation will

start picking up, beginning with consumer price data for June.

Some of them believe softening demand could make it harder

for businesses to pass on tariffs to consumers.

Stripping out the volatile food and energy components, the

PCE Price Index increased 0.2% last month. That followed a 0.1%

rise in the so-called core PCE inflation in April.

In the 12 months through May, core inflation advanced 2.7%

after rising 2.6% in April.

The Fed tracks the PCE price measures for its 2% inflation

target. The central bank last week left its benchmark overnight

interest rate in the 4.25%-4.50% range, where it has been since

December. Economists expect rate cuts to resume in September.

"While some goods prices will probably increase, there is

little danger of a more broad-based increase in inflationary

pressure as services spending is slowing," said Andrew

Hollenhorst, chief U.S. economist at Citigroup. "Weaker consumer

demand can also translate to softer hiring, raising downside

risks to the Fed's employment mandate."