Is so-far-so-good consumer demand nearing an inflection point?

Temperature check on the U.S. economy

In each edition of Consumer Says, our economists give an updated rating for current economic conditions using temperature as a metaphorical metric. Our “perfect temperature”--signifying an economy that is strong but not overheating–is 70 degrees. 

🌡️ Current temperature: 65 ℉

In our previous newsletter distributed two weeks ago, we rated the economy at 66 degrees. While in some ways, a lot has changed since then, with the U.S. initiating direct involvement with the Israel-Iran conflict, the domestic economy has not undergone major shifts. As we highlighted in our analysis released last week, consumer spending has held up relatively well so far in 2025, underpinning overall growth. That said, recent signs in our high-frequency data suggest we may be inching toward an inflection point, warranting a slight cooling in our estimation of the current economic “temperature”.

Consumer says:

😵‍💫Consumer sentiment has fallen through most of June: Yesterday, the Conference Board reported an unexpected decline in Consumer Confidence in June, attributable to factors like tariff-related worries and perceptions of less plentiful jobs. The reading of 93 was the second lowest score registered by the headline index since 2021, with the only lower reading occurring this April at the height of tariff concern and uncertainty.

• 📣Consumer Says: Morning Consult’s daily Index of Consumer Sentiment has similarly recorded a decline through the latter half of June, with all underlying components coming down from recent highs. Notably, the Conference Board’s preliminary data collection window ended June 18th, prior to the announcement of U.S. strikes on Iran this past weekend; Morning Consult’s data has shown a further slide since that time, suggesting sentiment has continued to worsen in the interim.

🛒 Spending growth may be starting to cool: The Census Bureau’s May retail sales report, released last week, featured its largest headline month-over-month drop since March 2023, falling 0.9%. Some of this weakness, however, was likely driven by price declines in categories like gas and autos. In fact, core retail sales, which exclude autos, gas and building materials, registered an increase in May.

• 📣Consumer Says: Morning Consult’s U.S. consumer spending data, which is similar to PCE in that it covers a broader array of goods and services categories than just retail, showed a modest decline of 0.5% in May (after adjusting for inflation and seasonality). However, spending was up a robust 4.3% in year-on-year terms, suggesting consumer demand has held up despite headwinds thus far in 2025. Looking ahead, maintaining this pace of expansion may become more challenging. The boon of recent inflation relief may be offset as more tariff impacts appear in market prices. Furthermore, Morning Consult’s Consumer Health Index (CHI), which provides a high-frequency look at consumer demand patterns, has faltered in the past two weeks, reversing its upward trend for most of 2025.

💼 Labor market slows, slowly: Despite the elevation of interest rates since 2022 and the public handwringing about the impact of AI on worker demand, the U.S. labor market has remained stable so far. Unemployment is stuck at 4.2% in the most recent reading, and new unemployment claims remain low. Hiring has substantially slowed, leading to longer-term unemployment for those without jobs, and wage growth is moderating. At the same time, the absence of widespread layoffs has helped support a relatively stable workforce and, in turn, enabled financial security for most U.S. households.

• 📣Consumer Says: Morning Consult’s U.S. Unemployment index suggests joblessness remains modest, but has recently been rising. Should this trend continue, U.S. consumers may face more strains ahead, as rising unemployment tends to have a lagged, negative impact on consumer demand. The freeze in hiring currently being experienced by jobseekers is not a huge problem for the economy when most people are already employed, but as more unemployed workers enter the labor pool, weak job openings could become more of a problem as the long-term unemployed begin to run out of savings before they can find a new income source.