2Q 2025 Newsletter - Resilience Amid Optimism
Resilience Amid Optimism: What We're Watching this Summer
Recent months have brought promising news about strong consumer spending. Industry reports indicate that the total amount spent by households on goods and services, as measured by Personal Consumption Expenditures (PCE), continues to grow. Expectations are for growth of 2.3% this year, which follows 2.8% growth in 2024.
Volatility persists, however. Even though headline inflation has moderated from its 2022 peak, the US Consumer Price Index (CPI), still rose by 0.2% in April, and is up 2.3% year-over-year. While this overall change in prices paid does reflect a 12.7% decrease in the price of eggs, many are watching the market for price increases brought on by tariffs, expected to be felt as we approach mid-year.
Add in geopolitical uncertainty and we face a mixed bag of economic data as we look ahead to the second half of the year. We see evidence of consumer resilience under pressure, but also key variables that merit watching in the coming months.
Let’s take a deeper look at economic indicators, causes for concern, and why we remain (cautiously) optimistic.
Consumer Spending Remains Strong, For Now
Consumers drive two-thirds of US Gross Domestic Product (GDP) and they’re spending at healthy levels, despite interest rates substantially higher than three years ago. Across the country, households are generally continuing to spend on travel, restaurants, and discretionary purchases. Even existing home sales have remained fairly stable in the face of much higher mortgage rates.
What’s driving this spending in spite of a substantial decline in consumer confidence?
The labor market remains strong with 4.2% unemployment. Energy prices are also low, with a barrel of oil now costing about $60, and the average price of a gallon of gas near $3 or less, depending on where you live.
Total spending may also be supported by higher earners. Recent reports indicate the top 10% of earners now account for 50% of consumer spending. And with real estate and equity valuations near all-time highs, the ‘wealth effect’ impact on consumption has been real.
Spending categories are shifting – away from big-ticket durable goods and toward experiences, which may reflect changing consumer behavior as we face increasing macroeconomic volatility.
Consumers Are Watching Inflation and Interest Rates
At a 2.3% annualized rate, inflation has cooled from the 9.1% peak we saw in 2022, but remains above the Fed’s 2% target. Interest rates persist at levels that have increased the cost of borrowing. Those realities have trickled down into consumer sentiment, which declined for a fifth straight month in April, approximating levels last seen as the COVID pandemic was unfolding earlier this decade. That uncertainty has manifested in growing caution around committing to long-term financial decisions like assuming new debt or big-ticket purchases.
In April, the inventory of homes on the market nationwide increased 30.6% year over year and surpassed April 2020 inventory levels, setting a new post-pandemic high.
Offsetting this uncertainty are historically high job openings and rising wages, which consumers are looking to as they offset qualms about higher credit card and loan APRs and historically elevated inflation.
A Closer Look at First Quarter GDP Data
GDP slowed in the first quarter, more than economists had expected. For the first three months of 2025, US GDP shrunk at an annualized rate of -0.3%, pulled down by a sharp rise in imports.
Why the spike in imports? Growing evidence suggests that companies may be stockpiling goods in anticipation of potential tariffs as global supply chains become more uncertain and economic powers increasingly debate, impose, and negotiate trade tariffs.
While we could view this increased spending as support that companies expect continued, and perhaps growing, future demand, we should also recognize that the international macroeconomic environment is complex, and in some senses, fragile. Positively, consumption increased 1.8% in the quarter and, as it stands now in mid-May, the Atlanta Federal Reserve Bank’s GDPNow index is projecting 2.5% growth in the second quarter.
What Could Tariffs Mean for Consumer Behavior?
As the specter of future tariffs persists, will these trade tensions materially impact prices across a wide swath of consumer goods, from electronics and apparel to food and household items? If costs rise, the strength of consumer resilience may give way.
So far, shoppers have absorbed higher prices without dramatically pulling back. But if tariffs lead to meaningful price hikes in key categories, we may see more pronounced belt-tightening. The key question: Will strong employment and wage gains be enough to offset future inflationary shocks?
Tailwinds Worth Noting
Amid the noise rising from tariffs, geopolitical uncertainty, and rising consumer prices, what are the tailwinds that continue to provide a case for consumer optimism?
> Lower Energy Prices – Gasoline and home heating costs have been significantly lower than this time last year, freeing up more discretionary spending.
> Tight Labor Market – The unemployment rate remains near historic lows, and job growth, while moderating, remains steady. Many households continue to see stable income flows, and the number of multiple job holders is trending upward, suggesting a growing base of supplementary income.
> Tax Cuts and Jobs Act Extension – There’s growing consensus in Washington around extending certain provisions of the 2017 Tax Cuts and Jobs Act. If finalized, this would preserve lower personal income tax rates for many Americans, creating a continued tailwind for household budgets.
Supply Chain Risks Return
Despite cooling inflation, supply chain pressures may soon resurface. The Red Sea shipping disruptions, softening of just-in-time inventory models, and geopolitical tensions could lead to renewed shortages of select goods. These may not be widespread, but they bear watching—especially for price-sensitive items like groceries, consumer electronics, and pharmaceuticals.
If shortages do occur, and retailers struggle to keep shelves stocked, it could create price spikes or availability concerns just as back-to-school and holiday spending ramps up.
What We're Watching
As we move further into the second quarter, our focus remains on several evolving signals:
> Consumer credit trends: Are households leaning more on debt to sustain spending, or are they pulling back in anticipation of leaner months?
> Tariff implementation and trade policy: Will new tariffs materialize, and how quickly might they be felt in retail prices?>
> Employment shifts: Particularly in tech, logistics, and services, sectors that can serve as early warning indicators of broader softening.
> Energy markets: Lower prices are currently a gift to the consumer. But how stable are they heading into summer driving season?
Bottom Line
The US consumer has proven remarkably resilient. Amidst inflation, rising interest rates, and the uncertainty in the global landscape, Americans continue to spend, supporting businesses and the broader economy.
Still, resilience is not invincibility. Strong employment and steady incomes have buffered many families from economic turbulence, but external pressures like tariffs, supply chain disruptions, or labor market softening could quickly change the outlook.
We remain cautiously optimistic. There are solid supports in place, and proactive monitoring will help us adjust course if conditions change. For now, the message is clear: the consumer is still carrying the load—but the road ahead could get bumpier.
We’ve weathered these storms before and we will weather them again, together, as we always have, through fortitude and prudence, and resilience in the face of uncertain economic times.