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By Hugh Cameron
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According to several indicators, Americans are tightening their purse strings as uncertainty grows over the future stability of the U.S. economy.
Why It Matters
Concerns are mounting that the U.S. is on the brink of a significant economic downturn, sparked by tariff-related market volatility, notable declines in consumer confidence and warnings from economists and financial institutions.
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As well as signaling a further increase in these economic fears and a continuation of inflationary difficulties, a marked slowdown in consumer spending—which accounts for over two-thirds of the nation's GDP—could itself increase the possibility of a recession in America's near-future.
What to Know
According to the most recent report from the Bureau of Economic Analysis, consumer spending fell 0.2 percent in January having increased 0.8 percent in December. This marked the first monthly decline since March 2023 and the largest decrease in inflation-adjusted spending in nearly four years. In addition, January also saw a significant drops in discretionary spending on things like clothing and footwear (down 4.7 percent) as well as motor vehicles and parts (down 41.1 percent).
Business executives have also begun observing declines in spending from their customers. At a recent event hosted by the Economic Club of Chicago, Walmart CEO Doug McMillon said that "budget-pressured" customers were cutting down on their purchases.
He said customers were exhibiting "stressed behaviors," such as purchasing smaller packs as "the money runs out before the month is done."
The company's Chief Financial Officer John David Rainey previously warned that tariffs could prove "inflationary" for Walmart's customers.
During the company's most recent earnings call, Dollar General CEO Todd Vasos said that customers were exhibiting similar signs of inflation-induced anxiety.
"Our customers continue to report that their financial situation has worsened over the last year as they have been negatively impacted by ongoing inflation," Vasos said. "Many of our customers report they only have enough money for basic essentials, with some noting that they have had to sacrifice even on the necessities."
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While recent data, including Thursday's consumer price index reading, showed a slowdown in inflation, prices are continuing to rise, with American households struggling to keep up with the increasing cost of living, particularly for essentials such as food, housing and energy.
The Wall Street Journal, citing credit card transaction data from Citi, reported that spending has declined across most retail sectors. In the year to date, spending on clothing and athletic footwear has decreased by 12 percent and 22 percent, respectively, compared to the previous year, while luxury goods spending fell 9.3 percent year-over-year in February.
This week, some of the nation's largest airlines also warned that weak demand will weigh on their upcoming financial results.
Southwest, in a recent regulatory filing, revised down its forecasts for the first quarter, blaming this on "softness in bookings and demand trends as the macro
environment has weakened."
American Airlines similarly warned that its first-quarter results will fall short of expectations, attributing this to the fallout from the January 29 D.C. crash, as well as "softness in the domestic leisure segment, primarily in March."
What People Are Saying
David Rosenberg, founder and president of financial research firm Rosenberg Research, told Newsweek: "Uncertainty causes consumers and firms to become more cautious about their spending plans. The tariff actions by themselves will be met first with a contraction in real incomes, which will translate into declining consumer expenditures, which represent nearly 70 percent of GDP. The layoffs in the federal civil service and multiplier impacts from this retrenchment pose an added constraint on the economy going forward."
Delta Air Lines CEO Ed Bastian recently told CNBC: "Consumer confidence is coming down a little bit, as we all know. That's why the market is in the challenge that it is. And as a result of that, we saw companies start to pull back in terms of corporate spending - started to stall. Consumer spending started to stall. Largely domestic, largely in the close-in. But it was also exacerbated, as you know, by the uncertainty that's out there and consumers in a discretionary business do not like uncertainty. And while we do believe this will be a period of time that we pass through, it is also something that we need to understand and get to calmer waters."
David Wessel, senior fellow in economic studies at the Brookings Institution, told Newsweek: "All the uncertainty about tariffs and chaos in Washington will lead lots of consumers and businesses to defer spending – on new cars, on home renovations, on big capital investments, on hiring. And if everyone pulls back at the same time, we get a recession. Confidence is easier to destroy than to rebuild. That's the big risk right now."
What Happens Next
The next official report on consumer spending from the Bureau of Economic Analysis is scheduled for release on March 28.
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