Spending Strength Threatened by Growing Downside Risks

Consumer spending remained strong throughout the first quarter of 2025

Across most categories tracked by Morning Consult, spending increased through the first quarter of 2025 — spending on services, housing, durable and non-durable goods all increased from the end of 2024. This is in contrast to the declines in the Index of Consumer Sentiment (ICS) that began escalating in late January, as consumers became more pessimistic about the U.S. economy. 

The ICS is composed of five subindexes, mirroring the survey by the University of Michigan. Declines in the ICS came primarily from the three future-oriented subindexes that comprise the top-line number. At the same time, the indexes measuring current conditions have remained relatively stable, particularly for the current personal finances index. 

Furthermore, many measures of the U.S. economy continue to perform relatively well. Inflation grew slightly at the end of 2024, but is back down to around its last low in September 2024 at 2.4% year-over-year in March. And while the labor market has cooled somewhat with hirings and wage growth down, unemployment is still low by historical standards at 4.2%. In other words, despite the economic outlook becoming more uncertain as more economists predict a recession later this year, so far this expectation hasn’t manifested in a slowdown in consumer spending.

High-income consumers in particular continue to spend robustly

High-income consumers — those making $100k a year or more annually — continue to propel the strength in consumer spending. In the first quarter of 2025, wealthier consumers in particular ramped up their spending in each successive month. 

High-income adults increased their spending over the past few months on both essential purchases and non-essential goods and services, but particularly on the non-essentials. High-income households generally have more wiggle room in their budgets to allocate to discretionary spending, and thus they have greater flexibility to have months with increased splurging. On the flip side, they can also easily decide to pull back on these categories, especially if the economic outlook continues to darken. 

While middle- and low-income earners pulled back slightly last month, they still both spent more this March than in the previous two years, suggesting that strength isn’t only coming from high earners. These consumers have also had improved Consumer Health Index (CHI) scores in recent months, which bodes well for continued near-term strength if their employment or financial situation remains relatively stable. However, it is important to note that if tariff woes and growing uncertainty slow economic growth, we could see a reversal of the current trend.

Strong spending in Q1 could be partially supported by consumers pulling forward purchases ahead of tariffs

Some of the strong spending we’ve seen in recent months could be attributed to a “pull-ahead” effect due to impending tariffs. In Morning Consult’s most recent tariff survey, fielded shortly after “Liberation Day” on April 2nd, consumers who had purchased several durable goods and services in the past few months said they did so sooner ahead of tariff implementation. 

Notably, recent purchases for new vehicles appear to be particularly impacted by the announcement of new tariffs, with 42% of recent purchasers reporting they bought it sooner to beat the tariff price increases. Although widespread tariffs have been implemented across a range of goods and services from all countries at 10%, tariffs for autos and auto parts have had earlier and separate executive orders, with tariff rates slightly higher at 25%, perhaps making consumers more aware of the potential price increases for this category of goods. In fact, 61% of respondents said that they think automobile prices will rise due to tariffs, leading the pack of all categories surveyed, only second to groceries (65%).

Net intent to buy a new or used car hit a series low last summer but has been trending upwards since then. Savvy consumers who have had their eyes on a car purchase could be making these purchases sooner rather than later which benefits spending today. However, consumers don’t frequently purchase vehicles, so this kind of spending could boost numbers today at the expense of sales tomorrow, when we start to see tariffs impact supply chains and prices more meaningfully. 

Finally, while autos appear to be having a particularly strong “pull-ahead” spending effect, this seems to be widespread across all categories according to consumers – a majority of consumers said they increased their spending across a wide range of essential and non-essential goods and services due to impending tariffs. 

Alcohol spending, which was muted through the end of 2024, saw a boost at the start of this year

Some categories had robust strength in the first quarter seemingly unrelated to tariffs – one example is alcohol. Alcohol spending increased in the past few months amongst all adults, with a greater share reporting purchases in grocery/liquor stores as well as in bars. This comes off the heels of reduced alcohol spending through the end of 2024.

Alcohol spending was particularly strong for the usual suspects – millennials. Millennials, who generally lead the generational pack when it comes to alcohol, had pulled back spending particularly sharply last year. However, that trend appears to have endured a quick turnaround at the start of 2025.

It’s unclear why alcohol spending (driven mostly by millennials) bounced back so strongly in recent months. Still, the economic outlook does threaten to weaken or reverse this trend, especially for alcohol brands impacted by tariffs. Morning Consult’s price sensitivity index scores for all adults, including millennials, are around all-time highs for booze, meaning that when consumers run into higher-than-expected prices today, they’re more likely to forgo the purchase than they were a year or two ago. Substitution index scores are also elevated, suggesting that if prices rise for this category, we could see more inexpensive brands benefit from these consumer purchasing behaviors. In fact, substitution behavior for alcohol is higher than for the topline basket of goods and services tracked by Morning Consult. So, trading down behavior for this category could be particularly strong if prices rise enough to be noticed by consumers.  

While first quarter spending was strong, downside risks threaten the outlook in 2025

Along with other “hard” data measures of the economy, spending strength has been robust so far in 2025. “Soft” data, including consumer sentiment, continues to deteriorate, as downside risks for the U.S. economy grow. While markets rebounded slightly after a 90-day pause was announced for the far reaching tariffs announced on April 2nd, many tariffs are still in place including a 10% broad-based tariff on all countries (excluding Mexico and Canada which face a 25% tariff on all non-USMCA compliant imports) and a 145% tariff rate on China. Even with the pause, the average tariff rate in the U.S. is at a historical high, never before experienced in our modern economy, increasing economic uncertainty. 

We have yet to see the impact of these tariffs on most hard data, especially on the consumer side. While some companies have passed on a “tariff tax” line item in receipts onto consumers already, aggregate price level data has not been materially impacted as of yet. As some of these costs are passed onto consumers more, we could see a pull-back in spending from consumers, who are much more price sensitive, and therefore likely to walk away from goods and services that elicit “sticker shock” than they were the last time inflation soared a few years ago. 

Deteriorating optimism about the future of the U.S. economy is not the only warning signal consumers are flashing about the tariffs – Morning Consult survey data indicates across a wide range of goods and services that consumers have started making purchases sooner in order to save costs ahead of impending tariffs. Most adults do not regularly purchase durable goods like vehicles and furniture, so pulling-ahead spending in these categories in particular could be inflating spending strength today while leading to more muted spending in the future. 

Finally, while much has been discussed about the potential cost pass-through of tariffs to already price-sensitive consumers, it's becoming more evident that escalating policy uncertainty and the disruption of supply chains significantly risk slowing economic growth in addition to raising costs. Again, this has yet to translate much into hard data so far, but anecdotal reports of slowing shipments and trade are becoming more abundant. Much of the current spending growth has come from a highly employed labor force with strong and improving personal finances on average. If slowing growth moves companies to shift from a period of slowing hiring to a period of reduced employment, spending strength will surely weaken.