By Alicia Wallace, CNN

(CNN) — The US economic engine sputtered in May: Consumer spending declined for the first time since January, according to new data released Friday that also showed inflation heated up on an annual basis.

The Commerce Department report showed that consumer spending fell 0.1% last month after rising 0.2% in April. When taking inflation into account, spending declined by 0.3% for the month.

A nearly 50% drop-off in motor vehicle sales was a significant driver of the May spending retreat as consumers rushed to dealerships to buy cars in March and April, fearing that President Donald Trump’s tariffs would send those costs soaring.

However, Friday’s report also showed that consumers pulled back on spending at restaurants and hotels.

Consumer spending powers more than two-thirds of US economic activity, and economists have expressed concern that the steep tariffs on most imported goods — and, especially, the mounting uncertainty of how Trump’s trade policy could affect the economy — will erode Americans’ resiliency.

“Apart from autos, households are also shelling out less for services (notably restaurant meals), with volumes flat in May after little rise in April,” Sal Guatieri, senior economist at BMO, wrote in a note Friday. “This could reflect some anxiety about the trade war.”

The Personal Consumption Expenditures price index was 2.3% for the 12 months ended in May, versus 2.2% in April. On a monthly basis, prices rose 0.1%, unchanged from April.

Economists were expecting the PCE price index to rise 0.1% from April, resulting in the annual rate ticking up to 2.3%. They expected spending to pick up slightly to 0.3%, according to FactSet.

Excluding the volatile food and energy categories, the core PCE price index rose 0.2% from April and ticked up to 2.7% on an annual basis.

Tip of the iceberg for tariff impact

Trump’s broad (and fluctuating) slew of tariffs have yet to cause a noticeable jump in inflation, but that’s to be expected.

Among the key reasons for that: Economic data is lagged; there have been significant shifts in tariff policy, and some of the most aggressive duties were curtailed, paused or lessened; businesses front-loaded purchases, building up their pre-tariff inventory and offering up discounts to keep from alienating customers; and some costs from the initial waves of new tariffs might have been absorbed by retailers and manufacturers.

Some categories, such as home furnishings and toys, are starting to reflect higher prices, and those increases are likely the tip of the iceberg.

“The conclusion is that, essentially, there is more to come, and it will be a larger shock,” Gregory Daco, chief economist at EY-Parthenon, told CNN in an interview.

Higher prices are expected to hit in the coming months, but only after pre-tariff inventories are depleted, Oren Klachkin, Nationwide Financial Markets economist, wrote in a note to investors.

But progress on trade agreements could lessen the blow, he wrote, noting news Thursday that the White House and China signed a deal.

“The US-China trade news yesterday is ostensibly encouraging as it suggests the threat of April tariff levels is now off the table,” Klachkin wrote.

Still, he cautioned, there’s too much up in the air on the trade front for the Federal Reserve’s liking.

“We don’t expect any rate cuts over the summer but see [three-quarter-points’ worth] of easing by year-end after evidence of a weaker labor market emerges,” he wrote.

A slew of critical labor market data will be released next week, with the June jobs report due out Thursday, because of the July 4 holiday. Economists are expecting the report will show a continued cooldown in labor market conditions, with job gains slowing to 125,000 and the unemployment rate potentially rising to 4.3%, early forecasts from FactSet show.

Consumers, economy risk running out of steam

Personal income fell more than expected for the month, sinking 0.4%; however, 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 for reduced benefits under prior legislation.

Despite the recent months’ volatility in those income numbers, the trend is one where income growth “remains quite subdued,” Daco said.

“Real disposable income (what’s left after taxes) is currently trending at a pace of 1.7% year over year,” he said. “That will bring down consumer spending from the 3% (annual) pace that we were accustomed to through most of 2024 closer to 1.5% over the coming months and perhaps even below 1% in the back half of 2025.”

The closer spending growth gets to 1%, the more vulnerable the US economy becomes, he cautioned.

“You’re much more subject to a stalling,” he said. “You’re exposed to price shocks, oil prices shocks, tariff shocks, interest rate shocks, stock market shocks, and therefore you’re more at risks of experiencing a more significant slowdown or possibly a recession.”

And, by and large, consumers are ill-equipped to weather any kind of economic storm, said Elizabeth Renter, senior economist at NerdWallet.

“A rush of federal dollars helped the economy recover from the fastest (and one of the deepest) recessions in history, contributing to high price growth that households were largely able to absorb,” Renter wrote in a note on Friday. “Now, debt levels are climbing, savings are spent down, and consumers are simply more vulnerable.”

In May, the personal saving rate fell to 4.5% after jumping higher in April, a month that saw the Social Security payments surge.

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