Consumer Spending Is Running Out Of Steam and the Market Isn’t Ready For It

A key source of US economic growth this year -- consumer spending -- is showing signs of losing steam, even before Wednesday’s round of Federal Reserve rate hikes kick in.

Credit card data show that spending in May was just 10% higher from the same month last year, according to a Barclays report this week. For the rest of 2021, that monthly spending growth has averaged more like 20%.

That slowing growth, combined with weakening home sales and declines in wage growth, would mean that monetary tightening is already hitting the economy hard. The Fed may be able to tighten less aggressively in July, according to Barclays, which is forecasting just a half percentage point rate hike next month. Rates markets indicate a strong chance of a three-quarter percentage point hike.

The stock and corporate bond markets don’t reflect the risk of a weakening consumer, wrote Barclays strategists including Ajay Rajadhyaksha, Ryan Preclaw, and Hale Holden, in a separate Tuesday note. The slowing growth of consumer spending underscores how difficult the Fed’s job is now as it looks to contain inflation that’s running at a four-decade high, while trying to avoid tipping the economy into recession.

The softening only started in the last four to six weeks, but it was visible among both high- and low-income consumers, the strategists said, based on a sampling of Barclays credit card data. And it’s consistent with a report on Wednesday that showed retail purchases fell 0.3% in May from the month before, the first decline this year.