Economy Loses Momentum as Inflation Direction Remains Uncertain

Consumer spending — the engine that drives the U.S. economy — is flagging, helping to reverse what seemed like relentless growth in gross domestic product (GDP) in previous quarters.

On Thursday (June 26), the Bureau of Economic Analysis reported that the economy shrank by 0.5% in the first quarter, a downward revision from the 0.2% decline that had been previously estimated.

The latest and final estimate of GDP comes against a backdrop where GDP accelerated by 2.4% in the fourth quarter of last year.

The latest data reflects broad-based weakness in consumer spending and exports, along with surging imports.

Consumer Spending Revised Lower

Consumer spending was revised lower, now showing just 0.5% growth, with declines concentrated in services such as recreation, transportation and international travel. These discretionary categories are perhaps among the most vulnerable categories for a pullback in consumer spending.

Tables released in tandem with the latest report indicate that spending on goods, on an annualized basis, were essentially flat in the first quarter, where that pace had been positive through the past several quarters. Exports were also revised down, particularly in services like business services and intellectual property.

Final sales to private domestic purchasers, a key measure of core private sector demand, rose 1.9%, down from 2.5% in the prior estimate. This suggests resilience in private sector activity but confirms a loss of momentum.

Inflation remained sticky, and in fact got a slight boost in the latest data released on Thursday. The gross domestic purchases price index increased by 3.4% (revised up 0.1%). The PCE price index increased 3.7%.  These figures reaffirm persistent inflation pressures in early 2025, slightly firmer than initially reported.

Corporate profits fell by $90.6 billion in Q1, an upward revision from prior estimates but still a sharp reversal from the Q4 2024 surge. The decline reflects higher input costs and softening demand in several sectors.

Despite strong investment and stable private demand in the economy, the Q1 GDP report points to a shaky economic foundation shaped by volatile trade flows, contracting government spending and weakening consumer activity.

The near-term picture is far from clear. The surge in imports may abate, having been part of a spending frenzy amid trade war uncertainty. That would relief at least some pressure on GDP. But consumer spending may also see continuing pressure.

As PYMNTS reported earlier this week, the Conference Board reported that consumer confidence declined in June, retracting a portion of May’s gains.

The look ahead, in terms of forward-looking expectations, showed a 69 reading, down from 73.6 in May. Future business conditions also waned, as 16.7% of consumers said they expect business conditions to improve in six months. That’s lower than the 19.9% in May.

The Conference Board has said that the 69 tally of future expectations was “substantially below the threshold of 80 that typically signals a recession ahead,” according to comments that accompanied the release.

“Compared to May, more consumers were undecided about plans to buy big-ticket items overall. Buying plans for most appliances were slightly up, while plans to buy electronics goods were down. Consumers’ intentions to purchase more services in the months ahead weakened compared to May, with almost all services categories declining,” The Conference Board said.

Some discretionary spending categories declined as well, though others showed gains. Electronics and appliance store sales fell by 0.6% in May, with total sales of $7.6 billion, representing a 1.9% year-over-year decrease. Health and personal care retail sales were 0.1% lower. Notably, spending at restaurants and bars was 0.9% lower.

The month of May falls squarely in the second quarter, and the end of July report on that period’s GDP may give further evidence of a tightening of the household wallet.