Key takeaways
Consumer spending remains the key to ongoing economic growth.
A solid job market, low unemployment and wage increases help support consumer spending and a growing economy.
Flagging consumer sentiment appears to reflect concerns over the potential inflationary impact of some Trump administration policies.
The key role consumers play in driving U.S. economic growth is evident in data showing solid consumer spending in recent years. Persistently healthy consumer spending from 2021 to 2024 led to solid economic expansion. The question for investors now is how long will the environment persist?
Market observers wonder whether consumers can afford to maintain recent spending trends. U.S. retail sales dipped modestly in January 2025, down less than 1% from December 2024. Yet sales are more than 4% higher from a year earlier.1 It is not clear yet if January’s dip represents more than a temporary setback.
Another issue is consumer sentiment. The University of Michigan’s February index showed a sharp drop in consumer sentiment, about 10% lower than January’s reading and 16% lower than a year earlier.2 It’s not clear that consumer sentiment will be reflective of future consumer spending, but the issue is now in sharper focus.
“We have to wait and see how new tariffs ultimately affect the data to see if consumer spending could be altered,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “We’re still waiting to see if consumers will keep spending money as they did in recent years or if they may pull back.”
The latest data comes in the wake of new economic policies proposed by the Trump administration. President Donald Trump is actively seeking to implement significant tariff increases on major trading partners, including China, Canada, Mexico and the European Union. “We have to wait and see how new tariffs ultimately affect the data to see if consumer spending could be altered,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “We’re still waiting to see if consumers will keep spending money as they did in recent years or if they may pull back.”
In 2024’s fourth quarter, personal consumption expenditures represented nearly 68% of the nation’s GDP. Healthy consumer activity is the primary economic growth driver.3
Debt funds an increasing proportion of consumer spending. By 2024’s end, total household debt in the U.S. reached a record high $18.13 trillion. This represents a 3.6% increase over the amount of debt held one year prior.4
While debt levels bear close scrutiny, they may not yet present significant concerns. “The consumer debt growth rate has slowed,” notes Haworth. “Many households appear to be fixing balance sheet issues before problems arise.” Haworth points out this behavior is unlike that of the era leading up to the 2007-2009 financial crisis.
After declining steadily through 2024, January 2025’s household savings rate jumped from 3.5% to 4.6%.5 By historic standards, the savings rate remains low. “Something closer to 6% is considered typical,” says Haworth.
There’s only been a gradual upward trend in overall consumer borrowing. Of all major debt categories, credit card debt is growing the fastest. Total U.S. credit card debt topped $1 trillion for the first time ever in the second quarter of 2023, and increased 7.1% over the one-year period ending December 31, 2024.4
Through 2024’s third quarter, household debt service payments represented, on average, about 11% of disposable personal income. The number is little changed in recent quarters. While higher than the recent low point of 8.3% in early 2021, it remains below recent peak levels in 2007 and 2008, when debt amounted to more than 13% of disposable income.6
Investors and Federal Reserve (Fed) policymakers are closely attuned to labor market trends. Haworth believes the Fed is increasingly focused on maintaining a healthy employment environment and will be inclined to cut interest rates as necessary to maintain it. So far, with the unemployment rate at 4.0% and average hourly earnings rising faster than the inflation rate,7 to this point, little Fed action seems required. The Trump administration is taking major steps to reduce federal government employment, but federal workers make up roughly 2% of the overall nonfarm job market, according to Beth Ann Bovino, chief economist for U.S. Bank. “The loss of federal jobs would be a negative shock, but we would need to suffer several shocks in order to experience a recession,” says Bovino.
A real-time indicator of labor market strength is found in initial weekly jobless claims data. For the week ending February 22, 2025, jobless claims jumped to 242,000, the highest level since early December.8 According to Haworth, “That number is still historically low.” He says a longer-term, rising jobless claim trend must be seen before markets will consider it a troublesome trend.
At least for now, Haworth believes the labor market can sustain consumer momentum. “In the current environment, consumers have tools to deal with credit issues and they’re taking advantage of that,” says Haworth.
It’s important to consider the current economic outlook as you evaluate your own portfolio of investments. Talk to your wealth planning professional to assess how your portfolio can be best positioned, keeping in mind current market dynamics and your long-term financial goals.
The market continues to draw the attention of the Federal Reserve as it considers further interest rate cuts.
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