Fitch Ratings: U.S. consumer spending is slowing sharply, pressured by a weakening labor market and rising inflation from tariffs

U.S. consumer spending slowed sharply in the first half of 2025, retreating from the strong momentum of late 2024, according to Fitch Ratings’ latest U.S. Consumer Health Monitor. Weaker sentiment and confidence, driven by heightened trade policy uncertainty and volatile equity markets, weighed on household demand, while a cooling labor market further constrained income growth.

“As tariff-driven cost pass-throughs push up goods prices and add to inflationary pressure, the risk of a stagflationary environment later this year is rising,” said Olu Sonola, Head of U.S. Economic Research at Fitch. “Goods categories are expected to be hit first, which could dampen spending heading into the holiday season.”

Household spending growth slowed to just 0.5% in the first quarter and 1.4% in the second, down from 3.7% in the third quarter of 2024 and 4.0% in the fourth. Services spending growth cooled to 0.6% in 1Q25 and 1.1% in 2Q25, while durable goods outlays contracted at an annualized 3.7% pace in the first quarter. Fitch noted that goods spending remains particularly volatile under the weight of tariff shocks. The agency now projects consumer spending growth will average 1.8% in 2025–2026, well below the 2.8% recorded in 2024.

Household net worth slipped 0.9% in the first quarter, reflecting weaker equity market performance tied to tariff worries. Still, Federal Reserve data shows households maintained stable liquidity buffers, with deposits representing about 10% of total assets.

Real estate equity also eased after peaking earlier this year, as elevated mortgage rates and affordability pressures continued to cool the housing market.

Consumer confidence staged a rebound in May after falling steadily from December through April. However, Fitch cautioned that ongoing labor market softness is likely to cap further gains in household sentiment.