How does consumer spending impact economic growth?

Consumer expenditures drive nearly two-thirds of U.S. economic activity, ¹ making Americans’ spending essential for continued economic growth. Jobs, incomes and growing asset prices are key ingredients for a healthy consumer. Our metrics show that strong aggregate spending growth continues to support economic and corporate earnings growth. although higher income consumers pace this trend.

Wage growth and minimal layoffs have offset slower hiring in recent months. “Wage growth to this point still outpaces inflation, so the signs remain encouraging,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management Group. The latest labor market data shows that U.S. workers’ average hourly earnings grew 3.7% over 12 months ending in August. By comparison, the most recent Consumer Price Index, a primary inflation measure, increased 3.0% over the 12 months ending in September. ² As a result, consumer incomes continue to outpace rising living costs nationwide.

Significant tariff hikes on goods we import from major trading partners could push costs higher, but so far, these increases remain contained. President Donald Trump has announced and delayed tariff plans on several occasions. The effective tariff rate, based on U.S. Treasury revenue and Census Bureau import data, reached nearly 11% in August. The Yale Budget Lab estimates that announced tariffs could push this rate as high as 16.7%, depending on consumer substitution and tariff negotiation outcomes. ³

High frequency data remains favorable

Investors rely on indicators that provide real-time economic signals, as these frequently updated measures often lead economic trends. According to Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, “Consumer spending proxies, retail sales, credit and debit card swipes, restaurant bookings and other high frequency consumer data suggest aggregate consumer behavior remains solid.” Merz adds, “Likewise, domestic rail activity, trucking tonnage, and inbound containers to the Port of Los Angeles remain normal.”

Consumer sentiment holds steady

Consumer sentiment has stabilized, improving from earlier declines. In May, the University of Michigan’s Index of Consumer Sentiment hit its second-lowest point in history after tariff uncertainty triggered stock price declines. ⁴ Sentiment has rebounded, though it remains below 2024 levels.

Debt’s role in consumer spending

Consumer debt keeps rising, but at a slower pace. Household credit grew 3.3% in the second quarter compared to last year, slightly below the 20-year average. Debt growth also trails consumer spending, indicating that rising incomes drive recent spending growth. Credit card debt stands out, rising 5.9% versus a year earlier. ⁵

“A key to consumers maintaining generally healthy balance sheets is that income growth outpaces inflation,” says Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. “Nominal wages are still gaining on the cost of living.”

Labor market trends and consumer spending

Recent Bureau of Labor Statistics revisions show lower job creation than initially reported since March 2024. Non-farm payroll reports reveal slower hiring, with job gains averaging 123,000 per month in early 2025 versus 27,000 in the most recently available four months. However, low initial weekly jobless claims suggest limited firing and the unemployment rate stands at 4.3%, only slightly higher than last year. While companies aren’t laying off workers en masse, they aren’t hiring aggressively either.

The Federal Reserve (Fed) cut interest rates in September and investors anticipate two more cuts by year end and additional cuts next year. In determining future policy, the Fed continues to balance concerns about inflation risks, possibly fueled by higher tariffs, with the potential for future labor market weakness. Interest rate policy impacts consumers, as it influences borrowing costs like mortgages, auto loans and credit card balances.

Consumer discretionary stocks, reflecting resilient consumer spending, performed well recently, posting a 6.3% gain over the past three months. In 2023 and 2024, the S&P 500 consumer discretionary sector delivered 42% and 30% total returns, respectively, signaling consumer economic optimism. In 2025, consumer discretionary stocks are lagging behind faster growing sectors while the broad S&P 500 is up more than 15% year-to-date. ⁶

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