How does consumer spending impact economic growth?

Consumer spending is the key driver of ongoing economic growth. Amid reports of flagging consumer sentiment and concerns about the potential inflationary impact of tariffs, markets are closely monitoring consumer spending as a key indicator of continued economic growth. On this point, consumers remain in a strong position to help keep the economy on track.

Consumer sentiment swings on tariff news

Declining consumer sentiment is a notable trend. Declining consumer sentiment has been a notable trend in 2025. In May, the University of Michigan’s Index of Consumer Sentiment reached its second-lowest point in history, dropping nearly 3% from April’s already low level, and down 26.5% from a year earlier.¹ But the Conference Board’s Consumer Confidence index jumped on May 27th after a 90-day tariff pause was announced by the Trump administration.

“The earlier drop in consumer sentiment was closely related to rising inflation expectations,” says Matt Schoeppner, senior economist for U.S. Bank. “The biggest consumer concern is around prospects for reduced purchasing power stemming from higher tariffs.” President Donald Trump’s trade policies, which focus on increasing tariffs on imported goods, could affect retail prices.

Schoeppner says concerns may go further. “There seems to be more consumer anxiety about the state of the labor market. If we see material weakening in the labor market, that raises some red flags that could impact actual spending activity,” he notes. He adds, however, that so far the job market remains healthy.

Consumer sentiment surveys don’t necessarily portend actual negative economic results. The lowest University of Michigan consumer sentiment reading occurred in June 2022. However, the economy subsequently experienced a period of solid expansion. “The relationship between consumer sentiment and actual economic growth is not strong,” says Beth Ann Bovino, chief economist at U.S. Bank. “Consumer sentiment definitely seems to be reflecting fears about rising prices.” According to Bovino, while moods improved after the 90-day US-China pause, uncertainty over the trade war, not just with China, will continue to run high until negotiations are finalized.

Retail sales slow in April

In April 2025, retail sales slowed considerably. After rising 1.7% in March, the advance estimate for April retail sales showed just a 0.1% monthly increase. However, for the February through April period, retail sales were nearly 5% higher than during the same period in 2024.²

“The jump in March retail sales is likely attributable to consumers pulling forward spending to get a jump on planned tariffs,” says Schoeppner. “Nevertheless, the general trend shows the consumer remains quite resilient.”

Consumer resilience helps keep the economy on track. In 2025’s first quarter, Personal Consumption Expenditures accounted for more than two-thirds of the nation’s Gross Domestic Product.

The role of debt in consumer spending

Consumers increasingly rely on borrowing to finance their purchases. In 2023, as U.S. credit card debt surpassed $1 trillion for the first time,³ concerns arose that household spending might retrench. Schoeppner says in recent months, concerns about debt levels have subsided.

“Even though credit card debt is at all-time highs, if you pair it with income gains (which have hovered near 4% annual growth in recent years⁴), the debt burden from credit cards has leveled off,” says Schoeppner. “We’ve seen some stabilization in new delinquencies and potential defaults.”

Contrary to concerns about consumer sentiment reflecting inflation fears, Schoeppner notes that, at this point, incomes are largely keeping pace with price increases. “Things aren’t as increasingly unaffordable as they might appear.”

Total U.S. household debt increased 3.6% in 2024, and rose only marginally, by 0.4%, in 2025’s first quarter. Notably, credit card debt is 6% higher than a year earlier.³

“From a broad perspective, consumer balance sheets remain in a healthy place,” says Schoeppner. “If financial wealth starts to become a drag, due to factors like stock market volatility, that could impact consumer demand.”

Can the labor market continue to prop up consumers?

The ability to maintain income levels is likely the most significant factor that will determine whether consumers can continue driving economic growth. Schoeppner believes the economy is likely to slow in the coming months, though not necessarily to the point of a recession. “Prices are still high and interest rates remain elevated, resulting in higher borrowing costs,” says Schoeppner. “If we add to that a softening labor market, that will likely mean slower spending going forward, but that doesn’t necessarily lead to a recession.”

The unemployment rate stands at 4.2%. It’s held near that level for close to a year. Through 2025’s first four months, the U.S. economy created an average of 144,000 jobs per month, a level considered positive, though not spectacular.⁴ Weekly jobless claims, a measure of job layoff activity, have remained relatively steady for more than a year.

The Federal Reserve (Fed) cut interest rates three times in late 2024, as concerns about potential labor market weakness arose. However, with unemployment remaining near historically low levels, the Fed has not yet been compelled to reduce rates further. In determining future policy, the Fed continues to balance concerns about inflation risks, possibly fueled by higher tariffs, with the potential for future labor market weakness.

The new environment, featuring higher tariffs, raises more questions. “There’s less optimism among consumers about future income, but it’s not clear at this point whether we’ll see any labor market deterioration in the near term.” However, Schoeppner emphasizes that the health of the job market is likely to be a key driver of consumer spending and economic growth going forward.

How consumer trends impact markets

Consumer spending accounted for over two-thirds of U.S. Gross Domestic Product (GDP) in 20245, exhibiting the strong influence consumer activity has over the broad economy. According to Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, “High frequency data indicates a benign tariff impact so far despite gloomy sentiment. Retail sales, credit and debit card swipes, restaurant bookings and other high frequency consumer data indicate limited discernable impact of tariffs on macroeconomic consumer behavior to date.” Merz adds, “Likewise, domestic rail activity, courier and trucking demand remain normal.”

While this bodes well for corporate earnings and asset prices for now, risks remain that eroding consumer sentiment will begin to dent economic activity. “Some retailers have noted cautious spending habits emerging in recent earnings announcements, while Wal-Mart, the largest retailer in the world, highlighted price increases are likely in the near term,” according to Terry Sandven, chief equity strategist for U.S. Bank Asset Management Group. Monitoring the interplay between traditional economic data, which is often reported on a lag, high frequency indicators of consumer behavior, and corporate earnings will provide a clearer picture of activity as tariff policies become clearer.

In 2023 and 2024, S&P 500 consumer discretionary stocks generated total returns of 42% and 30%, respectively. This reflected economic optimism and the sense that consumers felt comfortable making more discretionary spending decisions. However, in 2025, consumer discretionary stocks are down approximately 5% as investors and consumers digest tariff news and effects. Overall, the broad S&P 500 is up slightly year-to-date6 as the on-going economic expansion and the still healthy consumer support corporate earnings growth.

Consult with your wealth planning professional to determine how your portfolio can be best positioned, considering current market dynamics and your long-term financial objectives.