U.S. economy shrinks as Americans spend less

Americans spent less money last month, shrinking the economy and putting economists on high alert.

According to federal data released Friday morning, consumers spent nearly $30 billion less in May than in April. Personal spending makes up the lion’s share of the U.S. economy, and uncertainty about where economic policy is headed and whether a recession is on the horizon had many consumers pulling back.

Less spending — along with fewer exports and a glut of rushed imports as tariffs rolled out — shrank the economy in the first months of the year.

The news comes one day after the Bureau of Economic Analysis (BEA), an independent government agency, issued a routine revision to gross domestic product (GDP) data that showed a 0.5% decrease in the nation’s total economic output between January and March.

“It’s worse than we thought,” said Kathryn Edwards, an independent economic policy consultant. “To have a slowdown in spending is one of the biggest warning flags that we have that there is very deep trouble afoot in the economy.”

Minnesota’s economy contracted 2.4% in the first quarter, data released Friday show. Change in state-level GDP ranged from a 1.7% increase in South Carolina to a 6.1% drop in Iowa and Nebraska.

The S&P 500 hit a record high Friday, a discordant note that could be the calm before the storm, said John Beuerlein, chief economist at the Pohlad Cos. After many companies omitted financial guidance in their first-quarter reports amid tariff uncertainty, he said, second-quarter reports due in July may show a less-rosy picture.

“The stock market seems to be marching to its own drummer, there’s no doubt about that,” Beuerlein said.

The nationwide spending drop reflected a nearly 50% decline in spending on motor vehicles and parts, after many Americans rushed to buy before tariffs went into effect.

Declining government benefits — a reflection of one-time Social Security back payments in April — and lower farm incomes contributed to a nearly $110 billion drop in personal income.

Though Friday’s spending and income numbers showed big one-time swings, there are signs of a longer-term slowdown, “notably in travel and hospitality, reflecting the drop in overseas visitors as well as the chilling effect of the plunge in consumer sentiment,” wrote Michael Pearce, deputy chief U.S. economist at Oxford Economics.

“Much of the declines in personal income and spending in May was due to an unwinding of temporary factors,” he wrote, “but the trend in parts of discretionary spending has weakened, and we expect a further slowdown in the coming months as tariffs begin to weigh on real disposable incomes.”

The BEA initially estimated the U.S. economy shrank 0.3% in the first quarter, a sharp shift from 2.4% growth at the end of 2024.

GDP measures the value of goods and services the U.S. produces, and the quarterly data is adjusted for inflation and seasonal fluctuations. As with other economic indicators, the numbers are regularly revised to include the latest information.

If GDP is negative again in the second quarter, that would indicate a recession. Economists have upped recession predictions this year as the on-again, off-again trade war has rattled markets and slowed spending.

While tariffs are expected to raise prices, it’s unclear when that will happen or how long it will last. In an essay Friday, Minneapolis Fed President Neel Kashkari wrote businesses have been reluctant to pass price hikes on to consumers, and that many also built up inventories as a buffer against import tax hikes.

“While the debate of whether tariffs will lead to a one-time increase in the price level or to a more persistent increase in inflation is important, we also must try to determine if that price level increase is merely delayed or is likely to be smaller than what was announced,” Kashkari wrote. “This is challenging and will take time.”

Economic uncertainty has bruised consumer and business sentiment this year. Though sentiment is considered “soft” data — unlike more concrete measures such as inflation or the unemployment rate — it can indicate trouble ahead.

How consumers feel about the economy affects their behavior, including how much money they spend and where they spend it. If enough people make the same decisions, the economy can speed up or slow down.

This year, Americans have reported feeling worse about their personal financial situation and less optimistic about the future.

The latest Star Tribune/Hubbard School of Journalism and Mass Communication Minnesota Poll showed 47% of respondents feel the economy has gotten worse since Trump took office, while 30% say it has gotten better and 22% say it is unchanged.

The Conference Board’s Consumer Confidence Index reported Tuesday that confidence was down in June across all ages and political affiliations and nearly all income groups.

St. Paul resident Mark Zoller, 43, said he’s noticed the shift.

Zoller’s own financial situation is tight, but manageable. He and his wife both work good-paying, full-time jobs, he said, and though there’s not much left over after paying the bills — child care for their two children runs $40,000 a year — they can save here and there.

Once both kids are in public preschool, Zoller said, they should be OK.

The larger economy is more of a question mark. Until recently, Zoller said, things seemed to be on the up-and-up: New local businesses were opening; bars and restaurants were bustling; homes were selling quickly — “just a general good vibe of people spending money,” he said.

“Now, I don’t know,” Zoller said. “I think it’s starting to slow down.”

Some economists have questioned the link between poor sentiment and declining spending after President Joe Biden’s administration, when sentiment was low but spending stayed strong, said Tyler Schipper, associate economics professor at the University of St. Thomas.

But there are signs now that spending, which helped buoy the post-pandemic economy, is waning.

Retail and food services sales were down in April and May, and companies from General Mills to Winnebago are seeing declines. Cracks are even showing in spending on luxury goods, a sector often insulated by the financial security of its clientele.

“I just have a hard time imagining the consumer that is worried about both the state of the economy and rising prices and doesn’t change their consumption patterns at all based on that worry,” Schipper said. “I think there’s real worry about the path of the economy, rather than just who’s in charge of it right now.”