January 2025 marked a significant turning point in US economic trends as consumer spending experienced its first decline in nearly two years. This downturn was accompanied by a record-high goods trade deficit, partly driven by businesses accelerating imports ahead of impending tariffs. Despite a slight moderation in annual inflation rates, prices continued to rise steadily monthly. The US administration’s plans to increase tariffs are expected to further exacerbate price increases as businesses pass on higher import costs to consumers. This scenario highlights the delicate balance between trade policies and domestic economic stability.

In February 2025, consumer inflation expectations surged, reflecting heightened concerns about the economic outlook. The Atlanta Federal Reserve revised its GDP forecast for the first quarter, now predicting a contraction of 1.5% on an annualised basis, down from an earlier estimate of 2.3% growth. This shift in economic prospects has led financial markets to anticipate that the Federal Reserve will resume cutting interest rates in June, following a pause in January to assess the impact of the administration’s policies. The potential for economic contraction underscores the challenges faced by policymakers in maintaining economic stability.

The persistent inflation coupled with potential economic downturn poses a challenging monetary policy dilemma for the Fed. According to economic analysts, this situation is likely to create a complex conundrum for policymakers. As the economy navigates these complexities, the interplay between consumer spending, inflation and interest rates will be crucial in determining the trajectory of economic growth in the coming months. The Fed must balance the need to control inflation with the risk of stifling economic recovery, making the upcoming months critical for economic policy decisions.

Furthermore, the impact of tariffs on consumer spending and inflation is multifaceted. While tariffs aim to protect domestic industries, they can also lead to higher prices for consumers, potentially dampening spending further. This cycle of increased costs and reduced spending could exacerbate economic slowdowns. Therefore, US policymakers must carefully consider the broader implications on trade and monetary policy to mitigate potential economic downturns and ensure sustainable growth.

US consumer expenditure

Bottom line:

US consumer health is crucial as it significantly influences the economy, with approximately two-thirds of GDP derived from consumer spending. This spending directly or indirectly underpins both corporate and public revenues. However, challenges are emerging: COVID-era savings have been depleted, interest rates remain high and inflation persists. As a result, this has led to an increase in credit card debt and high repayment burdens. Consequently, there is heightened concern about potential further deterioration in consumer finances over the coming months.

Macroeconomics in Brief