Citi: Downward Revision in US Consumer Spending Lowers Hike Probability
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Citi highlights that the most crucial macroeconomic signal is not the seemingly robust May consumer spending, but rather the massive downward revision to first-quarter real consumer spending in the United States. First-quarter annualized consumer spending growth was revised down sharply from 1.4% to just 0.5%. This significant adjustment reveals that underlying growth in late 2025 and early 2026 was considerably weaker than previously reported, with overall GDP sustained primarily by artificial intelligence-related investments rather than household demand. While headline personal income rose 0.7% in May, underlying employee compensation growth remained modest.
Consequently, real income actually declined 0.24% year-over-year, constrained by higher energy costs and a persistently low savings rate of 3.0%. Regarding inflation, May core PCE printed at 0.32% month-over-month. While still above target, it fell below Citi's expectations. Additionally, continuing jobless claims have risen, indicating marginal cooling in the labor market.
This combination of decelerating consumer spending, contracting real purchasing power, and a softening employment landscape renders recent market pricing of a July rate hike increasingly inappropriate. Despite core PCE remaining elevated, Citi argues the underlying data supports the Federal Reserve maintaining a patient, wait-and-see approach rather than implementing further monetary tightening.
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