Declining Consumer Spending on the Global Economy- Matter of Concern

Consumer spending is a critical driver of economic growth, particularly in the United States, where it accounts for nearly 70% of the Gross Domestic Product (GDP). However, recent economic data suggests that consumers are becoming increasingly cautious with their spending, prioritizing essentials over discretionary purchases. This shift has significant implications not only for the U.S. economy but also for global markets. As consumer demand weakens, economic growth slows, trade dynamics shift, and uncertainty rises, affecting businesses, policymakers, and investors worldwide.  By the end of 2024, U.S. household debt reached a record $18.13 trillion, up 3.6% from the previous year. While debt growth has slowed, and the household savings rate increased from 3.5% to 4.6% in January 2025, the savings rate remains low historically, suggesting a limited buffer for further spending declines.

The latest retail sales report highlights a significant slowdown in consumer spending, with February sales rising just 0.2%, well below the 0.7% expected. This slowdown is driven by consumer caution due to inflation concerns, market volatility, and policy uncertainty.

Retail weakness in discretionary categories suggests that consumers are prioritizing essential goods, indicating a shift in spending behaviour. This trend is concerning because consumer spending is a major driver of GDP growth, particularly in post-pandemic years, offsetting weaknesses in manufacturing and other sectors.

Broader Economic Impact in the U.S.

Consumers are cutting back on discretionary categories like apparel, footwear, and electronics, while increasing spending on necessities and select experiences like cruises and international flights. There’s also a trend toward trading down, with 75% of consumers opting for cheaper alternatives, particularly in groceries, as prices for essentials like meat and dairy rise. The Federal Reserve Bank of Atlanta’s GDP. The Empire State Manufacturing Index dropped sharply, further pointing to economic weakness. Consumer Sentiment Decline: Consumer confidence has declined for three consecutive months, dropping 11% in early March, reinforcing the trend of reduced spending.

 Global Economic Implications

The slowdown in U.S. consumer spending has ripple effects worldwide, as the U.S. remains a key driver of global demand. The OECD forecasts global GDP growth to moderate to 3.1% in 2025 and 3.0% in 2026, down from 3.2% in 2024. The U.S. economy is deeply connected to global markets, and when American consumers cut back on spending, the effects are felt worldwide. The Organization for Economic Co-operation and Development (OECD) has projected that global GDP growth will moderate to 3.1% in 2025 and 3.0% in 2026, down from 3.2% in 2024. The slowdown is expected to be most pronounced in economies closely tied to U.S. trade, such as Canada, Mexico, and Brazil.

One of the most pressing concerns is the impact of trade tariffs. The Trump administration’s proposed 25% tariff increase on imports from Canada and Mexico, set to take effect in April, could further disrupt supply chains, raise inflation, and reduce consumer purchasing power. Higher costs for imported goods may lead to lower demand, negatively impacting industries reliant on international trade.

Key concerns include:

• Trade Tensions & Tariffs: The 25% tariff increase expected in April between the U.S., Canada, and Mexico could reduce trade volumes and increase inflation in all three countries.
• Global Economic Uncertainty: Countries like Brazil, Canada, and Mexico are expected to experience economic slowdowns, contributing to the overall weakening of global growth.

Outlook and Risks

• Near-Term Growth Risks: Consumer spending weakness could lead to further economic deceleration, and businesses may hold back investment due to policy uncertainty.
• Trade Policy Uncertainty: If tariffs remain high, global supply chains will be disrupted, driving inflation up and growth down.
• Possible Soft Landing: A deep recession remains unlikely unless a major economic shock exists, but risks are clearly tilted to the downside.

Conclusion

The recent decline in consumer spending is a warning sign for the U.S. and global economies. As households become more cautious in purchasing decisions, economic growth slows, and businesses face increasing financial pressures. While a full recession remains unlikely without a significant external shock, the risks are clearly tilted to the downside. Policymakers must carefully navigate fiscal and trade policies to support economic stability and restore consumer confidence. A balanced approach that addresses inflation promotes job security and mitigates trade disruptions will be essential in sustaining long-term growth.

The decline in consumer spending signals economic weakness, which could weigh on U.S. and global growth. If tariffs increase and uncertainty persists, business investment and trade could slow further, amplifying economic risks. While household savings and a strong labour market provide some cushion, policymakers and investors must remain vigilant to avoid a sharper downturn.