Consumer Spending Started Slow, But Daily Data Paints a Better, Albeit Cautious, Near-Term Outlook

Morning Consult’s U.S. Consumer Spending Tracker showing consumers’ average expenditures showed an uptick in January 2025 compared to the previous month. Most of the increase was driven by high-income households, reversing a pullback in December. While the increase is encouraging for consumers’ economic wellbeing — especially after a few months of slowdown — details on who is spending and what they are spending on makes us more cautious about this recent uptick’s momentum. 

In addition, there are risks on the horizon ranging from reemerging inflation to tariff uncertainty that makes the outlook more nebulous for consumer spending in the near term. That said, the Consumer Health Index based on Morning Consult’s daily data is in positive territory, indicating demand picking up once again in the near term.

Higher-income households lead on spending

Compared to December, the increase in spending was fueled by the high income ($100k+) and middle income ($50-$99.9k) households. The lower-income group decreased their spending- third time in a row. While month-over-month, spending looks more distributed among income groups, on a year-over-year basis, this is not the case: Only high-income households increased their spending relative to January 2024. Both lower- and middle-income households’ spending lagged compared to this time last year. The bounceback monthly and yearly only happened for the high-household income consumer. 

Spending driven by mostly essentials

Consumers focused their budgets mostly on essential spending in the first month of the year, which certainly has a seasonal element. After spending on travel and gifts during the holidays, January has traditionally been the month where consumers turn to themselves.  Other factors, such as cold weather (and wildfires in the West Coast) also partially affected discretionary spending last month. In addition, consumers saw higher bills for energy, housing and groceries (CPI for food away from home was 1.8% y/y in January 2025 as opposed to 1.2% in January 2024). These bills meant cutting back on spending that was higher previously: on hotels, shopping at department stores or home furnishings.

This lower gear of spending for discretionary items was also evident in the Census Bureau’s retail sales data. Spending at clothing stores, department stores, sporting goods, hobby, musical instrument, and book stores was lower compared to December 2024. Expenditures increased for gas (perhaps driven by a higher share commuting work in combination with higher gas prices) and groceries. In Morning Consult’s data, spending increased for similar essential categories, such as housing and groceries, as well as others such as utilities.

One exception to this essentials/discretionary divide was from spending at food services and drinking places, which posted a month-over-month increase compared with December 2024. Despite the cold weather, consumers still ate out, according to retail sales. Morning Consult’s data similarly shows that  consumer spending on restaurants (including delivery) continued to rise month over month.

While discretionary spending was lower and expenditures were more essentials-focused, it was only the higher-income cohort that increased its spending relative to January 2024, even for the latter category. Middle-income earners as well as their lower-income counterparts have lowered their nondiscretionary spending throughout 2024.

Both opportunities and threats on the horizon

Data we mention above is backward looking, but Morning Consult’s daily data — particularly our Consumer Health Index (CHI) — is showing an upward momentum in consumer demand looking forward. The CHI relies on the two daily economic indicators: current personal finances of the Index of Consumer Sentiment as well as the lagged measure of the unemployment index to gauge near-term consumer demand. As of now, almost all income cohorts have passed into the positive territory for this index, meaning that their demand will rise.

That said, it is not all good news. There are multiple headwinds for spending looking out at the rest of the quarter. First is the increased economic policy uncertainty, with a big uptick right after the presidential election, uncertainty has so far stayed at high levels. While current levels are much lower than they were during the pandemic, uncertainty is a looming threat that may cause consumers and businesses to pause on both near- and long-term spending.

The household finances remain fragile, especially for those making less than $50k in annual household income, since consumers do not have the savings buffers they used to have. Although unemployment is still low (Morning Consult data shows an upward momentum currently), the long-term unemployment rate has been creeping up. Inflation has been increasing and tariffs would likely support that momentum. Consumers’ credit conditions have been deteriorating with  delinquency rates for autos and credit cards rising, and interest rates are expected to stay higher for longer. Amidst the changes in political landscape, consumer sentiment took a hit and is hovering around a lower level. 

Some of the trends highlighted above — lower savings and worsening credit conditions — have been in place for a while and we have continuously called the U.S. consumer “resilient,” albeit one with a smaller pocketbook. The future trajectory of spending is dependent on how the threats above will stack against the positives (for example possible tax cuts putting money back in the pockets of the consumer). 

However, in the near term, the consumer demand is likely to increase, considering the consumer's employment situation as well as their view of their personal finances.