U.S. consumers remain cautious about their spending as inflation and the anticipated effect of tariffs proposed by the Trump administration fuel economic uncertainty.
Consumer spending increased in February by 0.4%, according to Friday’s report by the Commerce Department’s Bureau of Economic Analysis. Personal consumption expenditures, the Federal Reserve’s preferred measure of inflation, increased by 2.8% from a year ago and 0.4% from last month.
The small rise in consumer spending in February combined with a 0.2% decrease noted in last month’s report is an indication that consumer sentiment is still declining. People are tightening their budgets, being mindful of their spending, and increasing their savings. This uncertainty, powered by rising costs because of tariffs, could lead to a recession if continued.
“I think it says the economy is slowing here,” said Stan Shipley, an economist at Evercore ISI, an independent investment advisory firm. “It seems like core inflation is stuck here roughly at 2.8% over the past year, and now we’re headed into the risk of higher tariffs, which will almost unquestionably push some prices up higher.”
Spending on motor vehicles and parts fell by $41.1 billion in last month’s report, but this month’s showed an increase of $9.9 billion. Spending in this category is expected to increase even more in the report for March as car-shoppers race to avoid President Trump’s 25% tariff on all imported cars and parts beginning April 3.
With most other tariffs scheduled to take effect on April 2, economists say they expect consumer spending to bounce back in the March and April reports, because of a rush to purchase goods before higher prices kick in. “Uncertainty is very high,” Shipley said. “We really don’t know what trade policy will be. We don’t know what tax policy will be.”
The report also showed a 4.6% increase in personal saving rates, which, combined with careful consumer spending, could eventually lead to a soft GDP in the first quarter.
“We obviously have a pullback in consumption, but the pullback and the caution could persist through the second quarter,” said John Herrmann, founder of Herrmann Forecasting. Consumers are troubled by the inflation outlook, he added, “and they’re worried about the job market. So consumers pull back, and as a result, the savings rate jumped to, towards a 12-month high.”
This situation resonates with Lily Bartell, 33, of Astoria, Queens, a full-time golf instructor on Long Island who also works two part-time jobs.She lives with her partner, and even though both feel they are in a financially decent position, she said, she always has a side job to make ends meet. Now more than ever, she says she has to work even more to be able to fund the things that she wants to do.
“I am making more money, but my savings are not really going up or down,” she said. “Everything’s getting really expensive. We’re definitely tightening up with groceries and eating out – things that can add up so fast.”
The report also showed an increase of 0.8% in personal income last month, primarily because of increases in compensation and government transfers like Social Security.
“The gain in wages was pretty much in line with the gain that we saw in the payroll survey for hourly wages,” said Hermann, referring to the 0.3% increase in average hourly earnings reported in the Economic News Release published March 12 by the U.S. Bureau of Labor Statistics.
Many experts are concerned about how uncertainty and the on-and-off tariff announcements impact consumer sentiment. Referring to the February report, Shipley said: “This is the first month of the Trump administration. Here already, uncertainty is very high.”
For Bartell, tariffs are a huge concern. Golf clubs are manufactured primarily in China, and 25% tariffs on steel and aluminum will eventually drive up the price of her main work tool.
Hermann said: “All these concerns, all the old tracking consumption, all the elevated savings rates – everything is all pre-tariff.”