Consumer spending slows amid tariff concerns

[UNITED STATES] A surge in consumer spending sparked by fears of rising prices due to President Donald Trump’s tariffs appears to be losing steam, raising concerns about the broader economic impact in the months ahead.

Retail sales edged up by just 0.1% in April, a sharp slowdown from March’s 1.7% increase. Data from Bank of America indicates that spending on credit and debit cards has tapered off since late April, with year-over-year growth easing from 1.1% in March to 1% in the latter half of April. The trend has flattened further in May, showing no year-over-year increase so far, the bank noted in a report Thursday.

“Economic uncertainty remains elevated amid tariff-related price increases, and we’re closely monitoring consumer behavior,” Bank of America economists said. They added that the wave of preemptive buying ahead of expected tariff hikes appears to have largely subsided.

The tariffs, which target a broad array of Chinese imports, have rippled through the economy. Manufacturers dependent on overseas components have seen costs rise, prompting price hikes that are now reaching consumers. Retailers, anticipating further cost pressures, are adjusting inventory and pricing strategies with increased caution.

With consumer spending accounting for more than two-thirds of U.S. GDP, any sustained weakness could become a significant drag on economic growth. Economists warn that the psychological impact of tariffs—especially the fear of higher prices—could suppress discretionary spending in sectors like retail, travel, and hospitality.

Torsten Sløk, chief economist at Apollo Global Management, cited a weakening consumer as one of the top risks facing the U.S. economy. “Retailers expect prices to climb further in the coming quarters,” Sløk told Bloomberg on Tuesday. He noted that persistent inflation could compel the Federal Reserve to maintain higher interest rates for longer.

The Fed’s monetary policy will be pivotal in mitigating the economic fallout from tariffs. Should inflation continue to rise due to costlier imports, the central bank may be forced to tighten policy further—potentially dampening growth. Policymakers face the difficult task of balancing inflation control with economic support.

“If growth is slowing—which appears to be the consensus and what the data shows—we could face a stagflation scenario,” Sløk said, referring to the troubling mix of high inflation and stagnating growth.

Doug Ramsey, chief investment officer at The Leuthold Group, warned of a possible “self-fulfilling confidence collapse.” He pointed to a decline in consumer sentiment, including expectations of higher inflation and unemployment, as indicators that could severely impact GDP.

Consumer outlook plays a critical role in economic performance. Ramsey estimates that recent drops in consumer expectations alone could slash real GDP growth from about 3% to nearly zero. “Such an outcome would not just be self-fulfilling—it would be self-inflicted,” he wrote.

Analysts at Pantheon Macroeconomics echoed concerns of an economic slowdown driven by cooling consumer demand, though they believe the U.S. can avoid a full-blown recession. Still, the risk of stagnation looms large, especially given global economic fragility and ongoing trade tensions.

Businesses are already preparing for weaker demand. Hiring plans are being scaled back, with Fed regional surveys showing reduced hiring intentions and jobless claims unexpectedly high. “A significant portion of jobs could be at risk as consumer spending drops below trend in the third quarter, once the impact of price increases takes hold,” said Samuel Tombs, Pantheon’s chief U.S. economist.

Despite the recent easing in U.S.-China trade tensions, economic forecasters remain cautious. Goldman Sachs recently cut its 12-month recession probability from 45% to 35%, while JPMorgan suggested the risk, though now below 50%, remains notably high.