The insight: Consumers are cutting back on discretionary spending in anticipation of tariff-related shocks to their buying power, alongside existing inflationary pressures on necessities like groceries.

• Adjusted for inflation, consumer spending rose just 0.1% MoM in February after declining by 0.6% MoM in January, per the US Commerce Department.
• February marked the first time in over three years that US consumers reduced spending on services, with expenditures on food services and accommodations falling by 15% MoM—although some of the contraction was likely weather-related.
• However, spending on goods such as motor vehicles and parts spiked, a sign that some consumers are pulling forward purchases to avoid tariffs.

The big picture: Consumers are hunkering down as they lose confidence in the economy and grow more worried about their personal finances.

• Consumer sentiment is at its lowest level since late 2022, per the University of Michigan’s latest report, plunging 12% MoM and 28.2% YoY in March. That reflects worsening expectations for personal finances, business conditions, employment, and inflation among Republicans as well as independents and Democrats—a notable shift from the previous month.
• Households are opting to save rather than spend. The personal saving rate rose to 4.6% in February, up from 4.3% the month prior, despite an increase in real disposable income.

Retailers feel the sting: Unsurprisingly, given the economic climate, discretionary spending is not high on most people’s agenda.

• Lululemon athletica CEO Calvin McDonald noted an industrywide slowdown in US traffic in Q1, which he attributed to a decrease in spending “due to increased concerns about the inflation and the economy.”
• Many of Dollar General’s customers “only have enough money for basic essentials,” CEO Todd Vasos said—and some have even been forced to sacrifice even the necessities due to financial difficulties.
• The list of categories where consumers are pulling back include home decor (46%), furniture (43%), electronics (43%), apparel (37%), and footwear (35%), per a McKinsey survey.
• Services spending is also under serious pressure: Travel demand and restaurant spending are both tanking as slumping confidence saps consumers’ desire to splurge.

Our take: Consumer spending has been resilient over the past few years as rising incomes and a growing economy helped offset inflationary pressures.

But those conditions are changing fast: Economists expect GDP growth to soften in 2025, while inflation will remain above the Federal Reserve’s 2% target—igniting stagflation fears.

Those worries—coupled with concerns about the job market and a global trade war—will weigh heavily on consumer sentiment and spending this year.