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US recession fears rise as personal income and spending fall in May
Amid the fears of recession and inflation, the US consumer spending declined for the first time since January. According to the new data released by the US Bureau of Economic Analysis, personal income decreased by $109.6 billion (0.4 per cent at a monthly rate) in May. The Commerce Department report also showed that consumer spending fell 0.1 per cent last month after rising 0.2 per cent in April.
The 50 per cent drop-off in motor vehicle sales in May was a significant driver of the overall spending retreat. The vehicle industry saw a sharp decline in May because consumers rushed to dealerships to buy cars in March and April, fearing that President Donald Trump's tariffs would send those costs soaring.
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However, the Friday report also reflected that the consumers pulled back on spending at restaurants and hotels. It is pertinent to note that Consumer spending powers more than two-thirds of American economic activity. The sharp decline prompted concerns among economists who argue that the steep tariffs on imported goods will erode Americans' resiliency.
Consumer economy plunders over fear of Trump Tariffs
According to the data released by the US Bureau of Economic Analysis, Personal income fell more than expected for the month, sinking 0.4 per cent. However, the economists argued that the May decline was largely a reflection of Social Security payments returning to more typical levels.
In March and April, former public workers received large retroactive payments made under the Social Security Fairness Act due to reduced benefits under the prior legislation. Gregory Daco, chief economist at EY-Parthenon, told CNN that despite the recent months' volatility in those income numbers, the trend is one where income growth 'remains quite subdued."
'Real disposable income (what's left after taxes) is currently trending at a pace of 1.7 per cent year over year,' he said. 'That will bring down consumer spending from the 3 per cent (annual) pace that we were accustomed to through most of 2024 closer to 1.5 per cent over the coming months and perhaps even below 1% in the back half of 2025.'
He cautioned that the closer the spending growth gets to 1 per cent, the more vulnerable the US economy becomes. 'You're much more subject to a stalling,' he said. 'You're exposed to price shocks, oil price shocks, tariff shocks, interest rate shocks, stock market shocks, and therefore you're more at risk of experiencing a more significant slowdown or possibly a recession.'
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However, the figures are still concerning. Major economic forecasts now predict sharply slower growth for the rest of 2025, with real GDP expected to weaken to as low as 1.1 per cent by year-end, compared to 2.5 per cent in late 2024. Economists warn that persistent inflation, higher tariffs, and policy uncertainty are putting additional pressure on household budgets and business confidence.
Some analysts caution the US could be facing stagflation — a combination of slow growth and stubborn inflation — rather than a typical recession. The probability of a US recession in 2025 remains significant, with estimates ranging from 25 per cent to 40 per cent depending on the model and scenario. While the latest data do not guarantee an imminent recession, the combination of falling income, weaker spending, and negative leading indicators has heightened risks and could signal more economic trouble ahead.
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