The road to economic recovery resembles navigating unpredictable seas. The U.S. economy, after weathering pandemic-induced turbulence, now seeks equilibrium. May's decline in personal income and spending data casts shadows over recovery prospects—but should we sound alarm bells? What structural shifts lie beneath these numbers? This analysis examines the latest economic indicators to reveal the true state of America's consumption landscape and its global supply chain implications.
Personal Consumption Expenditures: Short-Term Volatility Masks Underlying Resilience
May saw a 0.1% monthly decline in real disposable income and a 0.4% drop in real personal consumption expenditures (PCE). Superficially, this suggests economic weakening. Yet a longer view reveals real disposable income stands merely 0.1% below January levels, while real PCE remains 0.2% higher. This indicates May's dip likely represents temporary fluctuation rather than sustained downturn.
Standardizing major PCE components (inflation-adjusted) with February 2020 (pre-pandemic) as baseline 100 reveals telling patterns. Only services consumption followed typical recession behavior—plunging 20% initially, rebounding 10%, then gradually recovering over two years to recently surpass pre-pandemic levels. This reflects pandemic-era caution toward in-person interactions and direct lockdown impacts on service sectors.
In stark contrast, durable goods (lasting 3+ years) and nondurables rebounded rapidly above pre-crisis levels. When federal stimulus measures took effect in spring 2021, durables consumption surged nearly 35%, with nondurables up 12%. This demonstrates stimulus successfully boosted goods demand temporarily. While durables later retreated, they remain nearly 20% above pre-pandemic levels—suggesting no sustained severe decline in income or consumption.
Consumption Transformation: Can the Goods Boom Endure?
Beyond aggregate changes, consumption structure shifts prove equally significant. Pre-pandemic, services comprised nearly two-thirds of PCE, with nondurables roughly doubling durables—ratios that remained stable. The pandemic economy's hallmark became goods consumption dominance, with goods' share of real PCE jumping from 36.0% in 2019 to 40.7% in 2021.
Key post-pandemic indicators now show this goods-services ratio returning toward historical norms. Notably, this rebalancing stems primarily from rebounding services consumption rather than goods decline—a positive signal for broader economic normalization.
Supply Chain Relief: Shipping Efficiency Improves
Flexport's ocean shipping timeliness metric (Transpacific Eastbound route) fell for five consecutive weeks before stabilizing at 96 days—the lowest since September 2021. Air freight metrics held steady at 11 days, indicating gradual global supply chain congestion easing.
Macroeconomic Data: Inflation Pressures Persist
May's income and spending report confirms stubborn inflation. Twelve-month PCE inflation held at 6.3%, matching April and slightly below March's 6.6% peak. Goods inflation moderated from 10.6% (March) to 9.6% (May), while services inflation hit a new 4.7% high—particularly concerning as services inflation rarely stems from temporary supply disruptions. The Fed's preferred "trimmed mean PCE" reached 4.0%, double its 2% target.
EU consumer confidence fell for nine consecutive months to -24.0 in June—near April 2020's historic low (-24.7) and far below the -10.5 long-term average. Inflation (8.6% in June) and Ukraine conflict drive this deterioration. Meanwhile, U.S. consumer confidence hit February 2021 lows, with short-term economic outlooks the gloomiest since March 2013 and 12-month inflation expectations at 8%.
U.S. goods trade activity rose 0.4% monthly (seasonally adjusted), though imports fell 0.1% for the second month—led by a 2.4% consumer goods decline now 10% below March peaks but still 35% above 2021 levels. May's durable goods orders unexpectedly grew 0.7% nominally against just 0.3% price increases.
South Korea's June exports grew just 5.4% annually—the slowest since October 2020—though adjusted for working days, growth reached 15.0%. Commodities drove expansion while autos, industrial machinery, and household appliances fell 3.1%, 13.7%, and 15.5% respectively.
Policy & Regulation: Trade Landscape Reshaped
The Biden administration launched trade talks with Taiwan covering facilitation, digital trade, and labor/environment standards—though Taiwan remains excluded from the Indo-Pacific Economic Framework. Meanwhile, the EU-New Zealand free trade agreement anticipates 30% trade growth and 80% foreign investment increases.
Britain extended steel "safeguard" tariffs to mid-2024 despite WTO rule violations, while legislation unilaterally modifying Northern Ireland's EU trade protocol advanced through parliamentary stages despite EU objections.
Supply Chain Updates: Semiconductor Sector Strains
Two U.S. semiconductor fab developers conditioned investments on pending fiscal legislation. South Korea's May semiconductor inventories grew 53% annually amid memory chip supply expansion, with suppliers noting customers seeking inventory reductions due to component shortages and macroeconomic concerns. Taiwan's 15% electricity price hike will pressure energy-intensive chipmakers.
U.S. May durable goods orders exceeded expectations with 0.7% growth, fueled by 2.6% defense equipment surges potentially linked to Ukraine support. Primary metals, industrial machinery, and communications equipment also outperformed. Wholesale inventories grew 2.0% monthly (25.0% annually), prompting operational changes including increased liquidation services and stricter return policies.
China's lockdown easing spurred manufacturing optimism, with Caixin surveys showing new orders re-entering expansion (50.2 vs. May's 49.6) and export expectations at April 2021 highs. OPEC+ maintained modest August production increases despite May target shortfalls.
With Brent crude at $110/barrel, governments consider refinery support—China may subsidize above $130/barrel, Vietnam cut gasoline import tariffs from 20% to 12%, and India imposed export curbs. The G7 pledged Russian energy price caps near production costs via transport/insurance restrictions, while the U.S. expanded sanctions to levy 35% tariffs on $2.3 billion annual Russian imports including chemicals, steel, and machinery.
This Week's Chart: Production Shocks Compared
Amid pandemic and semiconductor shortages, Japan's seven major automakers struggled to restore output. May's global production rose 2% monthly and annually but remains 31% below 2019 levels. Japan's 367,518 vehicles marked its fifth-worst month since 2009—comparable only to early pandemic lockdowns and the 2011 earthquake disaster.