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As the consumer goes, so goes the U.S. economy. Consumers make up roughly 70 percent of U.S. GDP. Our collective spending has powered the economy since the COVID-19 pandemic and proven wrong the 2022 and 2023 recession predictions by economists and investors. I like to call it the most telegraphed recession that never happened.
But as 2025 unfolds, is the economic engine starting to sputter? To find out, let’s look back at the path of consumer growth and where we might expect it to go from here.
Consumer Spending: 2020–2024
Five years ago this week, the global economy shut down. Initially, we retrenched our spending patterns and binge-watched a lot of Netflix. As we adjusted to the new normal, we began projects around the home. We spent money on durable goods such as appliances and furniture, even as supply chain constraints caused shortages in items like washers and dryers.
Slowly, we began to go out and do things. Our attention turned to experiences. We spent money on dining out, vacations, concerts, and sporting events. The Swifties got most of the economic headlines, but tickets to most big events were hard to come by. (I learned this the hard way when I promised my kids we’d go see the Celtics over the holidays!) From the end of 2020 to the end of 2024, consumer spending averaged annual growth of 4 percent.
The Consumer in 2025
The economy entered the year with solid momentum. Job growth was strong at year-end, and a solid employment environment generally leads folks to spend money. Still, perceptions can quickly change, and the consumer seems to be going through such a change currently.
In late February, the Conference Board released its monthly Consumer Confidence Index. It showed the third straight month of declines and the biggest monthly drop since the summer of 2021. Interestingly, it wasn’t the view of current business conditions that concerned those surveyed but the view of the future—specifically the cost of living.
Inflation has proven stickier than both investors and the Fed expected. Recently, surging egg prices due to the impact of bird flu and higher prices for used autos due to the California wildfires have added to the ongoing concerns about the price of shelter. This was reflected in a jump in the 12-month inflation expectations contained in the Conference Board report. Similar concerns were seen in the University of Michigan Survey (see chart below).
Source: The Daily Shot
Consumer concerns manifested themselves in the January personal spending data. Personal Consumer Expenditures declined by 0.2 percent in January. This was the first monthly decline seen since March 2023. Spending on real goods fell while spending on services eked out a small gain of 0.1 percent. But even this growth rate was the lowest seen in two years. As always with economic data, there are caveats. Cold and snowy weather could have impacted consumer behavior in January. Plus, consumers were coming off very healthy spending patterns in the fourth quarter of 2024.
American Consumers Are Resilient
Certainly, consumers are facing some headwinds they haven’t encountered over the past couple of years. Concerns about inflation and job security are understandable, and revisiting spending plans is a normal offshoot of these feelings. But American consumers have proven to be a resilient bunch.
Despite an uncertain economy, Friday’s job report was solid, with 151,000 new jobs created in February. Removing the month-to-month volatility, job creation has averaged a healthy 191,000 jobs since September.
In a speech on Friday following the jobs report, Fed Chairman Jay Powell gave a fairly upbeat assessment of the economy. He stated that the U.S. macro environment is in “a good place” with a “solid labor market.” This backdrop should continue to support consumer spending.
Consumers should also benefit from the rally in the U.S. Treasury bond market, where rates on the bellwether 10-year have dropped to 4.2 percent. This rate affects mortgage, credit card, and consumer loan interest rates, which should eventually put money in borrowers’ pockets.
Balance and Diversification Remain Key
Chairman Powell also said the Fed is “focused on separating the signal from the noise as the outlook evolves.” That makes perfect sense from a central bank perspective—but it’s also pretty good advice for investors and their portfolios. Headlines move markets day-to day, which we are seeing right now. But timing markets is difficult, if not impossible. Further, adjusting portfolios based on the daily headlines seems rather challenging.
During this period of volatility, returning to the tried-and-true rules of portfolio construction could be warranted. Balance and diversification are key tenets to navigate any market uncertainty. Different equity sectors, asset classes, and geographies have performed well this year compared to what we have seen over the previous few years. And bonds have served their purpose of muting equity volatility as has historically been true.
Now is a good time for investors to revisit their investment strategy and time horizon. The market will always be dynamic, but staying adaptable, tuning out short-term noise, and keeping long-term goals in focus are paramount. If market fluctuations create opportunities that don’t reflect actual economic fundamentals, investors should take advantage of them to enhance their portfolios. We will be watching for these opportunities over the coming days.
