Predicting Consumer Spending Trends in 2025: The Power of Job Opportunities and Savings
Consumer spending will significantly impact the economy in 2025, as it typically does. However, it's important to note that its influence can sometimes be exaggerated. The solid foundation of households, with increasing employment and wage growth faster than inflation, sets the stage for solid economic gains, albeit with the potential for continued inflation.
In the recent quarter, personal consumption expenditures amounted to a staggering 68% of the total gross domestic product. However, a significant portion of this amount is stable or not a cash expense, making the overall figure more stable and less susceptible to economic fluctuations. There are, however, some sensitive areas, such as durable goods and services, which can be impacted by economic conditions.
As of January 2025, job growth has increased by 1.4%, with unemployment rates relatively low at 4.1%. Despite some layoffs reported in the media, the U.S. currently seems to be in a layoff drought. Average wages have increased by 4%, while consumer prices have risen by 2.7%. Wage-earners are thus making progress in relative terms despite the high prices.
Disposable income, after taxes and inflation adjustments, increased by 2.6% over the past 12 months. Assets owned by households have also increased more than liabilities, generating a net worth increase of 11%. This, coupled with higher checkable deposits and reduced consumer credit, indicates that consumers are generally in a good position as we enter the new year.
Despite the positive signs, there are potential risks to consumer spending. These include tariffs, especially under a second term for President-elect Trump, international calamities, and recession. High tariffs could lead to price hikes, consumer anger, and reduced spending. Meanwhile, international conflicts could also affect consumer spending. However, the risk of recession remains relatively low at 26%.
Interest rates are expected to have a neutral impact on consumer spending, neither helping nor hurting the growth in car, boat, and other major-ticket items sales. In conclusion, total consumer spending should rise at a moderate pace in 2025, fueled by jobs, wage increases exceeding inflation, and past asset growth. However, businesses should not anticipate excessive spending on discretionary items in a level-interest-rate environment.
- With wages increasing faster than inflation and employment growth, individuals have more disposable income, potentially leading to increased savings.
- Higher wages and employment rates could also incentivize investments in stocks, bonds, or real estate, contributing to overall economic growth.
- Consumers may also choose to allocate a portion of their increased income towards reducing their expenditures, such as debt repayment or cutting back on non-essential spending.
- As a result of these factors, total consumer spending might be primarily driven by necessities and essential services, rather than discretionary or luxury items.
