May's lower spending, lower incomes don't mean recession. But stock market recovery is stupid

Friday featured the release of the always-important income and spending report from the Bureau of Economic Analysis. And if you look at the topline numbers, you’d swear we were heading into recession.

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.

…[P]ersonal 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.

Actually, given that the savings rate had risen from 3.5% at the end of 2024 to 4.9% in April, and only went down in May due to the drop in income, I wouldn’t say they’re not cutting back, Mike.

As the article alludes to, the decline in income wasn’t as bad as it sounds. Social Security income went down by $122.4 billion in May, which unwound a $107.6 billion gain in April and nearly $56 billion increase in March that reflected one-time payments for many public sector workers and their spouses who had been locked out of benefits.

Take that and a drop in farm income of $41.2 billion out of the equation (another unwinding, this one of increased subsidies and disaster relief payments over the previous 2 months) , and Americans still got more income from their jobs in May. And although that job income growth is slowing, it stll indicates slower growth and not recession for the real economy.

On the inflation front, the PCE Index seemed pretty good to me, only going up by 0.1% and 0.2% for core (minus food and energy). But the “experts” weren’t as happy with it.

Prices rose faster in May than forecasters had anticipated, and consumers unexpectedly lost income and pulled back on spending.

According to a report on Personal Consumption Expenditures by the Bureau of Economic Analysis Friday, "core" consumer prices, which exclude volatile prices for food and energy, rose 2.7% over the year. That is up from an upwardly revised 2.6% annual increase in April and higher than forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.

The uptick in core PCE inflation is especially significant because it's Federal Reserve officials' preferred inflation benchmark. The central bank sets the nation's monetary policy with the goal of keeping inflation running at 2% a year. Fed policymakers are currently debating whether inflation is tame enough to start cutting the central bank's influential federal funds rate, which affects borrowing costs on all kinds of loans.

PCE prices rose 2.3% over the year when factoring in food and gas, an acceleration from an upwardly revised 2.2% annual increase in April and in line with forecaster expectations. Falling gas prices helped keep PCE inflation relatively cool in May, similar to the CPI inflation measure, a separate report released earlier in the month.

And yet despite this belief that rate cuts the stock market closed at all-time highs on Friday because….I honestly don’t know why. Hopes that the Fed will cut in July anyway? Gambling on Tax Scam 2.0?

In the everyday US economy, things clearly slowed down in the first 2 months of Q2. The main source of GDP growth in our current quarter won’t be because of actual economic activity, but instead because the 1st Quarter's surge in imports is over, and we’re back near the trend in trade that we had before Trump Administration 2.0 became a thing.

Maybe the warm weather and rebound in the stock market made people want to spend more in June. But the data that we’ve seen so far would match with the type of deterioration that you’d see in a slowing economy where growth underperforms. Which is exactly what the Fed said in their economic projections last week, and remember that this is all before the worst of tariff-influenced inflation hits the store shelves.