We are living in the era of cautious consumerism.
These past weeks and months have been a trying time for investors, with the stock market roiled by President Donald Trump’s tariff plans and a landmark U.S. federal trade court ruling that looks like it could upend the lion’s share of the administration’s trade war with Mexico, Canada and China. Consumers, who are rattled by supposed signs of a recession that has yet to come, are equally unsure about whether to splash out for that new sofa or a new car, or save their money for a rainy day.
The latest barometers of consumer behavior suggest people are not sure which way to turn, so they are making more judicious decisions about their saving and, in particular, spending. Personal spending rose only 0.2% last month, the government said Friday, in line with a forecast of economists polled by the Wall Street Journal. The savings rate surged to 4.9% in March from 4.3% in February, reaching the highest level in almost a year.
And yet the enigmatic and, perhaps, resilient U.S. consumer seems more optimistic: The University of Michigan’s survey of consumer sentiment improved in late May to 52.2 from 50.8 in early May as some people decided that the tariff war with China might not be as damaging for the economy as feared. After falling for five consecutive months, the Conference Board’s consumer confidence index rose to 98 in May from a revised 85.7 in the prior month.
It’s not pretty out there
U.S. consumers, along with members of the Federal Open Market Committee, don’t know which way to turn, so they’re proceeding slowly. Jobless claims rose to a five-week high of 240,000 in the week ending May 24, but analysts say the end of school holidays and Memorial Day were partly to blame. GDP growth in the first quarter fell 0.3% and retail sales grew a paltry 0.1% in April after jumping a revised 1.7% in March, ahead of anticipated tariff-related price hikes.
It’s not a pretty scene beyond our backyards: Israel’s bombing of Gaza, Russia’s war in Ukraine, the political and legal wrangling over Trump’s trade war, a Federal Reserve immobilized by conflicting signs: slowing economic growth and yet low unemployment of 4.2%. Mortgage rates are pushing close to 7% after Moody’s MCO downgraded the U.S. sovereign credit rating from AAA to Aa1. Household debt hit another all-time high of $18.2 trillion in the first quarter.
Consumers are making more judicious decisions about their saving and, in particular, spending.
The U.S. Court of International Trade on May 28 ruled to vacate most of Trump’s tariffs, arguing that Trump could not justify such moves under the International Emergency Economic Powers Act. The ruling does not impact tariffs targeting sectors, enacted under the Trade Expansion Act, including a 25% levies on imported vehicles and certain foreign parts. The U.S. Court of Appeals for the Federal Circuit temporarily reinstated the tariffs, at least until mid-June. On Monday, the administration filed a new appeal in the U.S. Court of Appeals for the D.C. Circuit.
The Trump administration and the Chinese government appear to be far from a so-called truce. U.S. Treasury Secretary Scott Bessent told Fox News on Thursday. “I would say that they are a bit stalled. I believe that we will be having more talks with them in the next few weeks.” Trump, writing on TruthSocial on Friday, said China had “violated” its agreement with the U.S. “So much for being Mr. NICE GUY!” the president wrote.
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The upside of feeling conflicted
Until interest rates are at a level comfortable for consumers and there’s more stability in the medium-term political landscape (that may be longer than waiting for the next recession) consumers may continue to waver. Trump has called on Fed Chair Jerome Powell to cut interest rates to boost economic growth, but the Fed has rightly held onto its independence and is choosing to wait and see what happens with inflation, which hovered at 2.3% in April.
A conflicted consumer or Fed may be no bad thing. In the 1970s, the Fed cut rates when policymakers felt confident that inflation was under control, but in the 1980s Fed Chair Paul Volcker felt forced to hike rates, which hurt consumer spending and sent the cost of borrowing skyrocketing. That led to economic hardship. To put that in context, the federal funds rate peaked at nearly 20% in 1980-’81 (it’s currently between 4.25% and 4.5%).
Until interest rates are at a more comfortable level for people, consumers may continue to waver.
“We retain a ‘glass-half-full’ outlook, given the mix of stable economic and corporate earnings growth, and reasonable asset valuations across broad markets,” said Bill Merz, head of capital markets research for U.S. Bank’s Asset Management Group, citing the Fed’s tight monetary policy and gradually moderating inflation. “The Fed has reiterated time and again that they are awaiting additional data, with multiple FOMC members describing their ‘patient’ approach.”
In 2025, U.S. consumers and, let’s hope, Fed committee members are behaving in a smart and sensitive manner. Most consumers (60%) surveyed by McKinsey & Co. said they have already changed their spending habits or expect to change their spending habits in response to tariff news, even if the effects of those tariffs have yet to hit store shelves. “Low-income consumers were the most likely to say they would switch to a lower-priced brand or product,” it said.
Revelations at the coalface
What’s happening at the consumer coalface is a more revealing sign of how people really feel right now than consumer confidence and spending polls. Consumer behavior is nuanced and, obviously, our spending habits are not created equally. As far as big-ticket purchases are concerned: Car sales were strong in April and May because of expected tariff hikes impacting prices — Tesla TSLA being the exception — while existing homes sales fell in April due to high interest rates.
But people continue to seek value and, amid all of the uncertainty, are focusing on essential goods and services. Big-box store Costco COST is a case in point. The company is focusing on lower prices on key essentials like eggs, butter and olive oil, while stocking up on U.S.-made goods. It appears to be working: U.S. fiscal third-quarter same-store sales were up 8%. Luxury-goods giant LVMH, which owns 75 brands, on the other hand, reported a 3% fall in first-quarter organic sales in the U.S.
Personal spending is down, yet consumer confidence is higher. It’s not an anomaly. It’s the sign of a smart shopper. Americans are binge watching their favorite shows on Netflix NFLX, a relatively cheap leisure activity, providing an escape from the turmoil in the real world. “Entertainment has been pretty resilient in tough economic times,” Netflix CEO Greg Peters told a first-quarter earnings call in April. It depends on how expensive the entertainment: Movie-theater box-office sales are down 11% this year.
Consumers are carefully preparing for that rainy day.
More from Quentin Fottrell:
Trump threatens Apple with 25% tariff: Is it time to buy an iPhone?
Why America is obsessed with eggs
April’s jobs report: You won’t be surprised by the ‘best job’ in America
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