How does consumer spending impact economic growth?

Robust consumer spending growth continues to support both economic expansion and corporate earnings, with higher income consumers generating the greatest positive impact. Consumer spending is a key economic measure as it drives nearly two-thirds of U.S. economic activity.¹ Jobs, incomes, and rising asset prices fuel consumer health.

Wage growth and minimal layoffs have offset slower hiring in recent months. “Weekly jobless claims remain low and wages stable, based on U.S. Treasury income tax withholdings,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management Group. Although the government shutdown delayed some data releases, U.S. workers’ average hourly earnings rose 3.7% over the past year, outpacing inflation, which increased 3.0% in September according to the Consumer Price Index.² As a result, consumer incomes continue to exceed rising living costs nationwide. However, lower income earners have seen slower wage growth compared to higher earners, according to the Atlanta Federal Reserve’s wage tracker.

Recent tariff hikes on imported goods from major trading partners have caused only modest increases in core goods prices. President Donald Trump has announced and postponed several tariff plans. The effective tariff rate reached 11% in September and likely rose to near 12% in October. The Yale Budget Lab estimates that announced tariffs could push this rate as high as 16.8%, depending on consumer choices and negotiation outcomes.³

High-frequency data continues to paint a favorable picture

Investors rely on real-time indicators, which often lead economic trends. The recent government shutdown increased the importance of supplemental measures. Bill Merz, head of capital markets research at U.S. Bank Asset Management Group, notes, “Consumer spending proxies like retail sales, card swipes, restaurant bookings, and daily tax withholding statistics suggest aggregate consumer behavior remains solid.” He adds, “Domestic rail activity, trucking tonnage, and inbound containers to the Port of Los Angeles remain close to normal seasonal patterns.”

Consumer sentiments drops

Consumer sentiment recently dropped near all-time lows, according to the University of Michigan’s Index of Consumer Sentiment. Tariff uncertainty and political affiliation have influenced sentiment, while the shutdown and weaker payroll data have weighed on recent figures.⁴ Surveys tend to reflect average household perceptions, which may differ from the higher income cohorts driving strong aggregate spending.

Debt’s role in consumer spending

Consumer debt continues to rise, but at a slower pace. Household credit grew 3.6% in the third quarter compared to last year, slightly below the 20-year average. Debt growth trails consumer spending, indicating that rising incomes drive recent spending growth. Credit card debt stands out, rising 5.8% year-over-year.⁵

“A key to consumers maintaining healthy balance sheets is that income growth outpaces inflation,” says Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. “Aggregate figures show nominal wages still gaining on the cost of living, despite slower progress for lower income households.”

Labor market trends and consumer spending

Recent job data reveals lower job creation in 2025’s second half. The Bureau of Labor Statistics paused non-farm payroll reports during the recently ended government shutdown, but had revised job growth figures lower in recent months. Automatic Data Processing (ADP), a payroll management company, reported 42,000 private jobs created in October, well below the two-year average of 106,000. Meanwhile, low initial weekly jobless claims suggest limited firing, but companies are not hiring aggressively.

The Federal Reserve (Fed) cut interest rates in September and October, and investors expect about three more cuts by the end of 2026. The Fed continues to balance inflation risks, possibly fueled by higher tariffs, with potential labor market weakness. Interest rate policy affects consumers by influencing borrowing costs for mortgages, auto loans, and credit cards.

Stock market reaction

S&P 500 consumer discretionary stocks have underperformed broader markets recently, dropping 5.2% in 2025’s fourth quarter through November 18 and down 0.1% year-to-date. In 2023 and 2024, the S&P 500 consumer discretionary sector delivered 42% and 30% total returns, respectively.⁶ Weaker recent performance likely reflects the impact of high interest rates and slowing job creation, which have weighed on valuations this year.

Consult with your wealth planning professional to determine how to be position your portfolio, considering current market dynamics and your long-term financial objectives.