Chinese GLP-1, Cagrilintide Used by Americ...  •  Portland’s Yang Hansen Pick Shocks NBA Dra...  •  NYC’s AAPI Voters Help Power Mamdani to Vi...  •  Nvidia Passes Microsoft As World's Most Va...  •  Leverage Powerful Listening for Success  •  US Joins Ranks of World's Banana Republics
Chinese GLP-1, Cagrilintide Used b...  •  Portland’s Yang Hansen Pick Shocks...  •  NYC’s AAPI Voters Help Power Mamda...  •  Leverage Powerful Listening for Su...  •  Nvidia Passes Microsoft As World's...
                                                             

Subscribe

Subscribe Now to receive Goldsea updates!

  • Subscribe for updates on Goldsea: Asian American Supersite
Subscribe Now

Consumer Spending, GDP Growth Fall from Tariff Disruptions
By Reuters | 27 Jun, 2025

Disruptions and uncertainty caused by anticipated impact of Trump tariffs are causing a marked slowdown in consumer spending and GDP growth — with bigger impact to come once tariffs take effect.

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."

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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.

A sale sign is seen at car dealer Serramonte Subaru in Colma, California, U.S., October 3, 2017. REUTERS/Stephen Lam/File Photo

Articles

Asian American Success Stories