Reasons Consumer Spending Is Declining

Cracks in Spending and Manufacturing Begin to Form as Tariffs Filter Through the Economy 📉 What we expected for April retail sales has now materialized: a sharp pullback in consumer spending at retail stores and restaurants following months of stockpiling ahead of tariffs. 🏭 In a separate report from the Federal Reserve, manufacturing output declined by 0.4% in April—the first drop since October 2024. Even though prices have not risen as sharply as anticipated, falling confidence and weakened expectations have pushed consumers into a more cautious stance—particularly when it comes to durable goods, which are especially sensitive to both tariffs and income volatility. Within the retail sales report, the decline in the control group—used as a proxy for goods consumption in GDP—is a concerning signal as we head into the second quarter. 📊 Retail sales weren’t the only data pointing to softening demand. The unexpected drop in producer prices also reflected weakening spending, especially for discretionary services like air travel, financial services, and trade services—a proxy for retail and wholesale margins. The wide gap between CPI and PPI data suggests that, in April, businesses relied on existing inventories to shield consumers from rising input costs. But that came at the expense of business margins, which were compressed. That buffer may not last much longer. According to Walmart, the company plans to raise prices later this month in response to rising tariffs. ⚠️ We are now witnessing the first-order effects of tariffs on the economy—through reduced spending. The second-order impact—on prices—will likely emerge in the coming months, adding further pressure on demand. While a recession is no longer our base case over the next 12 months due to the recent reduction in tariffs, the likelihood has increased that the U.S. economy will endure several quarters of sluggish growth, with inflation remaining high enough to prevent the Fed from cutting interest rates.

Consumer Spending Sees Sharpest Drop in a Year Despite Surging Incomes The latest Bureau of Economic Analysis report reveals a striking shift in consumer behavior - personal income surged 0.9% in January, more than double the expected 0.4%, yet consumer spending fell 0.2% and inflation-adjusted spending dropped 0.5%, marking the steepest decline in a year. At the same time, the savings rate climbed to 4.6%, indicating that households are holding onto more of their money rather than spending it. This divergence suggests that consumers may be growing more cautious, shifting their financial priorities in ways that could have far-reaching economic consequences. Normally, rising incomes fuel higher discretionary spending. But instead of an acceleration in consumption, consumers are pulling back, a signal that uncertainty may be weighing on decision-making. Is this a one-off event, or the start of a broader trend? Extreme winter weather may have temporarily disrupted consumer activity, but inflation fatigue, elevated borrowing costs, and economic uncertainty could be playing a larger role. Even though inflation is cooling, prices remain substantially higher than pre-pandemic levels. The Core PCE Price Index, the Fed’s preferred inflation measure, rose 0.3% month-over-month and 2.6% year-over-year, continuing its gradual decline. But the fact that spending weakened at the same time suggests that many households are feeling the pressure of sustained higher costs. High interest rates are likely a key factor. Big-ticket purchases often rely on credit, and with rates elevated, financing a car, making home improvements, or taking on new debt has become significantly more expensive. This could be leading to a shift in behavior - consumers are earning more, but they are spending selectively or delaying purchases. The Federal Reserve wants to bring inflation down without triggering a recession. A slowdown in spending could reinforce the case for rate cuts later this year, but it also raises concerns about whether economic momentum is beginning to slow more than anticipated. Consumer spending accounts for nearly 70% of GDP, and if households are holding back despite rising incomes, it may be a sign that demand is weakening. For businesses, the combination of rising incomes and falling spending presents a critical challenge. Consumers may be shifting from impulse-driven purchases to a more selective, value-conscious mindset. This means companies may need to adjust pricing strategies, refine promotional tactics, and rethink marketing messages to resonate with a consumer base that is prioritizing financial security over discretionary spending. At Havas Edge, we track these economic shifts because they shape consumer sentiment, advertising effectiveness, and overall business strategy. #Inflation #CorePCE #ConsumerSpending #FederalReserve #EconomicOutlook

Kiwis are still doing it tough. They are being more careful with their spend and money doesn't go as far. The volume of spend per person, the chart below, has fallen sharply from highs in 2021-22, when the economy was strong and interest rates were at record lows. The current (Sep-24) level of spending is the lowest since mid 2016. This is explained by three broad factors. First, rising prices in recent years have taken up more of the wallet. People aren't buying more things; it just costs more. To cope, people are trading down or doing without. Sometimes its trading down from Watties to Pams, or cooking a fancy meal at home rather than going out. But some are also cutting back on basics, like buying fruit and veg less often (in 2023 around 40% of households didn't buy these items in a given week). But there is good news: retail prices were flat over the past year. Expect to see discounting in the coming months to encourage spending. Second, as people came off pandemic low fixed mortgages, higher mortgage payments squeezed out other spending and reduced saving. It was a real shock for some. But this is turning into relief now. In December, those refixing will go from an average rate of 6.3% to a lower rate: the current 2-year fixed rate of 5.7%. Lower interest rates by the RBNZ and globally are feeding through now (both of which affect mortgage costs). On average refinanced rates will be around 1%pt cheaper, compared to last couple of years when people fixed at up to 3%pt higher! Third, there is a continued air of caution. Mindset matters. When there is financial stress (43% of households are financially worse off compared to last year, while 21% are better off according to ANZ-RM consumer confidence survey) and uncertainty about job and career prospects (job ads are down 30% from last year, but has crept a little higher since August), it is hard to make big purchasing decisions (furniture for example). For retailers, this is a difficult trading environment heading into the traditionally busy Christmas trading period (we usually see a seasonal lift in November and December). In difficult economic times its really important to carefully segment your customers and match your sales efforts to each. What and how you sell to different customers has to be different. Marketing is a necessity- in a tough economy, growth comes from market share. Slowing net migration and fiscal austerity will continue to lean against the economy for some months to come yet. While this Christmas period may not be that jolly for retailers or consumers from a selling and buying perspective, there are emerging positive signs (so far more hope than action). The biggest support will be from further interest rate cuts by the RBNZ. Cheaper money will provide relief initially - which will put a floor under the economy, and eventually encourage new borrowing and investing, which will super-charge the recovery. But it may be some months yet.

Consumer sentiment surveys near 50-year lows show growing concern over personal finances, and the latest decline has hit high earners, typically the biggest spenders, especially hard. In past downturns, the top 33% of income earners were relatively insulated, but now even this group is reporting sentiment near all-time lows. In mid-2024, high earners' sentiment fell to just 0.8 standard deviations below average, while middle and lower earners fell to 1.5 and 1.8 below. Now, top earners' sentiment has plunged to 2.7 standard deviations below average, with other groups now at around 2.4 below, an ominous sign for spending ahead. Consumers across all income groups believe buying conditions for big-ticket items like cars, homes and durables are near all-time lows -- posing a severe risk to sales and keeping discretionary revenue growth suppressed in 2H. Sentiment about consumers' financial situations over the next year has plummeted to record lows across all income groups, surpassing even 2008 and 2022. Gina Martin Adams Bloomberg Intelligence

Tariff Terror The two major surveys of consumer attitudes, the Conference Board Survey of Consumer Confidence and the University of Michigan Consumer Sentiment Index have both deteriorated sharply since November 2024. The losses were due to a toxic mix of rising uncertainty on the trajectory for inflation - expectations are moving up - and an erosion in job prospects - they are moving down. The deterioration is broad based, hitting all income and wealth levels, ages, races and party affiliations. Headlines regarding tariffs and high profile layoffs no doubt fueled those concerns. The problem is that those concerns are starting to show up in the hard data. Consumer spending, which is the single largest driver of overall growth in the US, slowed markedly in the first quarter. The slowdown in spending, notably on leisure and hospitality coupled with a rise in the saving rate, suggests that consumers are hunkering down. That is to be expected in a highly uncertain policy environment. This is the same time that the PCE measure of inflation, which the Fed targets, accelerated in February. Other input prices have risen ahead of tariffs as firms scramble to front run tariffs. Investment is rising for the moment, as firms stockpile ahead of tariffs. Those shifts are borrowing from the future. The trade balance is widening on the front-running of tariffs. That is a drag on growth. Those figures include a surge in gold bullion, which is not included in the GDP data. No matter how the data is cut, we are seeing a slowdown in overall economic growth that is punctuated by rising prices. Employment has held up but is looking much weaker in March. That gets us edging closer to a mild bout of stagflation - rising inflation and unemployment. The rise in unemployment is limited by a loss in participation in the labor force. Foreign born workers participate ar higher rates than native born and older workers. The result represents a conundrum for the Federal Reserve. Much of the Fed’s leadership has evoked the 1970s as a cautionary tale. A failure to eradicate inflation and stimulate too soon triggered a vicious cycle of inflation and unemployment, or stagflation. One Fed leader has suggested that it might need to hike rates. When were tariffs deflationary? The Smoot Hawley Tariff Act of 1930 tipped off a trade war with 25 countries and a 67% drop in global trade, which plunged the global economy deeper into the depths of the Great Depression. That was chilling. Our analysis suggests that the effective tariff rate will easily lapse the peak of the 1930s by year-end. We have retaliation and a mild bout of stagflation. No rate cuts in such a scenerio.

How falling consumer sentiment is testing business resilience? A single data point from the U.S. can echo far beyond its borders. November’s plunge in American consumer sentiment, now at its lowest level in three years isn’t just a domestic signal of anxiety; it’s a warning pulse for global demand and corporate stability. As households tighten spending, the ripple travels across supply chains, from European exporters to emerging-market manufacturers. At the same time, a new wave of corporate layoffs from Amazon’s warehouse divisions to Nestlé’s regional restructurings and IBM’s AI-driven head-count reductions is reinforcing a feedback loop between sentiment and strategy. Leaders everywhere are being tested: How to protect margins and liquidity without eroding the confidence that keeps economies moving. In this edition, We explore how declining consumer confidence reshapes business resilience from the inside out affecting sales velocity, inventory cycles, and financial planning. Using the latest November data, we unpack what these sentiment shifts mean for decision-makers navigating slower demand, tighter liquidity, and an uncertain labor outlook.

Barclaycard data point to a very weak December for the UK. When November was weak, people blamed budget uncertainty. With the budget out of the way, consumers still held back. It's hard to overemphasise how important Christmas is for retailers. Almost 40% of small to medium sized retailers said in a recent survey that Christmas normally accounts for over half of their annual revenue. In short, it's fair to say that many retailers wouldn't be profitable for the year as a whole without Christmas. The chart below shows Barclays credit card spending. It mostly shows the year on year change in the number of transactions, to account for inflation. In a few categories, such as household, the change in the amount spent was lower than the change in the number of transactions, so there I have used the change in the amount spent. Clearly selling more stuff by discounting heavily negatively affects margins. These numbers look worse than the (still weak) BRC data that I posted about yesterday. So it could be that squeezed consumers are trying to use debit cards/cash rather than credit cards, to help control their spending. But looking ahead, the accompanying survey that Barclays did also points to weakness: Over half (56%) of UK consumers intend to reduce discretionary spending, with clothes and accessories (48%) being cited as the top cutback area.  Two in three (64%) consumers say they plan to cut spending on groceries in 2026. Of this group, three in five (59%) say they will make use of loyalty schemes, 52% will shop at budget supermarkets and 46% will buy own-brand products.  50% of consumers say that they are planning a quieter January with fewer social plans, amid the popularity of Dry January, rising to 56% for those aged 18-34. Two in five (40%) will limit socialising directly due to costs, as 39% say this cost prevents them from going out as often as they would like to. As for New Year's Resolutions: 51% are setting a New Year’s goal or resolution. Among this group, 35% will set a health-related goal and 33% will set a financial goal. Among those setting a financial goal, 47% plan to save more each month, 39% plan to stick to a budget and 30% plan to spend less on eating and drinking out. Now obviously, not everyone sticks to their New Year's resolutions, but faced with a deteriorating labour market, which could get worse in the New Year given the weakness in Christmas spending, there's sadly a better than usual chance that people will stick to these financial resolutions. Labour costs rising faster than consumer spending, squeezing company profits, leading to job cuts, leading consumers to cut spending further (even those who still have a job) is how recessions generally start. So if you're one of the lucky one's who can afford to and feel secure in your job, perhaps your New Year's resolution should be to eat out at your favourite local restaurant and go to your local high street this January.

Consumer Credit Crossroads: Spending, Saving, or Sitting Out? One year ago, Consumer Products bonds in the US HY Index traded 38bps (OAS) TIGHTER than the US HY Yield Master Index. The Consumer Products sector now trades 132bps WIDER vs. the index (note: both maintain the same B1 rating) or +160bps deterioration in spreads vs. the index. Investors and traders banking on the almighty consumer are feeling the pinch—ouch! The 90-day tariff pause has provided relief to this sector over the past 2 trading days. What comes next is critical. When spreads were tight over the past months, there was little dispersion. Dispersion is critical to judge, as there will be a growing delta between the winners vs. losers over the course of 2025—this will be critically important for investment performance. The elasticity of demand will differentiate the winners vs. losers since increased tariff costs will either be passed through to consumers, or NOT; the result will be important part of the formula that determines operating margins/profits. Wider spreads will present a buying opportunity of select issuers that have a strong moat and essential product selection—however, issuers with non-essential products, narrower margins and more susceptible supply chains will find a more challenging path ahead. In other words, these are the days when your credit investment manager is worth their weight (management fee). Consumer Products high-yield (HY) companies weakened as consumer sentiment declined and inflationary expectations rose; tariffs serve as the equivalent of corporate tax increase. Consumers now expect everyday essentials to become more expensive, leaving less room for discretionary spending, while tightening consumer credit and high financing costs provide limited access to finance big-ticket purchases. The net effect reduces demand for non-essential products. These factors collectively create a challenging environment for some HY companies reliant on robust consumer spending. With credit card APRs at record highs (around 20-25%), delinquency rates are rising for prime and non-prime customers. Consumer product companies will look to cut costs, solidify their supply chains that allow them to remain competitive (i.e., renegotiate supplier contracts) and/or localize production to offset tariff/inflation pressures. Notable names in this sector with meaningful China exposure include Newell Rubbermaid with ~15%, Spectrum Brands with ~45%, and Scott’s with up to 10% of their COGS, respectively. Late yesterday, Moody’s downgraded Newell Rubbermaid one notch (now Ba3 /Negative Watch) noting the company's ability to implement pricing actions to improve margins will be limited given the discretionary nature of most of its products and weaker consumer demand. During times of stress: up in quality, is my recommendation. As dispersion separates winners from losers, credit selection will be critical to performance as correlations remain wide.

Vehicle sales decline ranges from 2% up to 12% across various urban areas in India; Diwali isn’t Diwaliing! Automotive sales, a vital domestic demand indicator, are slowing down in cities, sparking concerns about India’s economic growth pace. Why highlight this? Even the affordable sub-Rs 10 lakh category, once a stronghold, is steadily declining. Let me do some data breakdown here: 🟣 Sales of two-wheelers, three-wheelers, commercial vehicles, and tractors in urban centers fell between 2-12% recently. 🟣 Four-wheeler sales in urban areas dropped nearly 3% in 2024-25. 🟣 Maruti Suzuki’s entry-level cars (<Rs 10 lakh) have seen a steep decline, previously forming 80% of sales in 2018-19, now facing growth challenges. Despite festive boosts, urban car sales growth remains “somewhat slower.” The under-Rs 10 lakh segment, which once accounted for 80% of car sales (2018-19), is now a pressure point. This category traditionally feeds growth in higher segments but is struggling to find traction in 2024. Positive signs, however, come from rural areas. Rural four-wheeler sales grew by 5% in 2024-25, a clear contrast to urban patterns. Is this an urban shift in vehicle consumption? Giving out my #Rajspective: 🧐 Urban slowdown and rural resilience Two demand patterns are emerging, with rural resilience in discretionary spending. Urban discretionary spending is shifting to essentials—visible in FMCG, apparel, and appliances (down 6-9% YoY). FMCG companies report urban consumption drops of 5-8%, attributing this to inflation (currently at 6.4% vs. 5.2% last year), squeezing spending across affordable segments. Data shows discretionary spending down by 7% YoY, as urban households prioritize essentials due to inflation and interest rates. 🧐 Budget-conscious segment under Pressure from Overheads The affordable segment’s slowdown is beyond perception. Rising input costs for manufacturers have increased vehicle prices in the sub-Rs 10 lakh category by 4-6% YoY, tightening affordability for consumers. 🧐 Consumer sentiment shift High inflation and seasonal factors have dampened urban purchasing power. Consumer price inflation jumped from 5.2% last year to 6.4% this year, affecting discretionary spending by 7% YoY. Another influence? The on-demand shift. Uber, Ola, and Rapido are reshaping urban attitudes toward ownership. Amid inflation pressures, millennials question, “Why own when you can rent?” So, the question is-- Will urban demand rebound or stay subdued? I believe this shift may be the new normal. #automotive #India #economy #growth #consumerdemand #FMCG

EY Macro Pulse 🤔 Lackluster US #retail sales 📉 A modest rebound in February #retail sales following a downwardly revised plunge in January indicates increased spending reluctance on the part of the consumers as flagging consumer sentiment, rising job insecurity, and another bout of cold winter weather took a toll on households’ willingness to spend. Aside from the strong increase online and at personal care stores, sales were mixed across retailers, and the largest decline in sales at restaurants and bars in two years suggests consumers are cutting back on non-essential expenses. 🛒 Retail sales rose less than expected in February, up 0.2%, while the January decline was revised lower from -0.9% to -1.2%. When adjusting for inflation, the volume of sales was flat given the 0.2% increase in #consumer prices reported for February. 🔍 Control Retail Sales – which is a key gauge of broader consumer spending trends that strips out the volatile components – surprised on the upside with a 1% advance following a downwardly revised 1.0% decline in the prior month. But the gain was supported by outsized gains in online shopping and personal care purchases that masked more mixed results at other #retailers. 🚗 Purchases of motor vehicles (-0.4%) were again a drag on top-line retail sales despite the increase in unit sales of new vehicles reported earlier this month. The still cold weather in February may have kept consumers away from auto dealerships. Consumers also spent less at gasoline stations (-1.0%), reflecting lower prices at the pump in February. 👗 Sales at clothing (-0.6%), recreational and sporting goods (-0.4%), and electronics and appliances (-0.3%) stores also fell. Moreover, spending at restaurants and bars (-1.5%) posted its largest decline in two years and has not grown in the last three months – which indicates that total consumer services spending could have been weak during the month. 📉 The latest data reinforce our expectations for softer spending momentum in Q1, with consumer #spending likely to grow around 1.2% annualized following a strong 4.2% advance in Q4 2024. 🔴 Cracks are forming in the #economy's foundation: Layoffs are creeping higher, hiring is slowing, consumer sentiment has deteriorated markedly, and inflation expectations are moving higher. As the negative impact from tariffs takes hold, slower income growth coupled with depressed consumer sentiment are likely to translate into slower consumption growth. While we don’t anticipate an outright pullback in consumer spending, recession risks are rising. Find the full note here via EY-Parthenon Lydia Boussour https://lnkd.in/dmpGXN_m