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Consumer spending will play a large role in the economy in 2025, as it always does. However, the impact has often been overstated. Nonetheless, the strong footing of households—in the aggregate—set the stage for solid economic gains this year, though with the potential for continued inflation. The key elements supporting the forecast of strong consumer spending include good employment with wages rising faster than prices now and accumulated savings and investments.

Personal consumption expenditures amounted to 68% of total gross domestic product in the most recent quarter. However, much of that amount is very stable or not a cash expense. Thus, the total is more stable and less subject to economic fluctuations that other parts of GDP, such as construction and business equipment purchases. Healthcare is a good portion of total consumption, 11% of GDP. Much of that is covered by some form of insurance. And eight percent of GDP is “imputed rental of owner-occupied housing.” That is, a person owns a home. The statistician considers that the homeowner pays himself rent at a market rate. The rent is both income and an expenditure. But no money changes hands, unless the homeowner chooses to shift some cash from the left pocket to the right pocket.

Still, some portions of consumer expenditures are quite sensitive to economic conditions, including durable goods (automobiles, furniture, sporting goods, etc.) and some services. Everyone has to eat food, but no one has to eat in a restaurant. The same number of calories can be bought expensively or cheaply. If consumers economize where they can, the aggregate total will come down sharply.
 

Consumer Income

As of January 2025, though, consumers are neither slowing down nor going overboard. Let’s begin with their income. Jobs have increased by 1.4% over the last 12 months, with the unemployment rate relatively low at 4.1%. News headlines have mentioned workers losing jobs, but the hard data on people filing initial claims for unemployment insurance suggests that the U.S. is in a layoff drought. The difference between news reports and aggregate statistics highlights the routine churn in the economy. New jobs are created while old jobs are lost. Some people will lose their jobs every month, even in months when hiring much exceeds dismissals.

Average wages have increased by four percent while consumer prices are up 2.7%. Prices still seem high, at least to those of us who recall 2020. But relative to a year ago, wage-earners are making progress.

As a result of the wage gains, disposable (after-tax) income adjusted for inflation increased by 2.6% over the past 12 months, a solid gain.
 

Consumer Assets

Assets owned by households have increased more than liabilities have, generating a large 11% gain in net worth. In addition to investments, which have increased in value, people have been keeping more money on hand. Checkable deposits plus currency holdings have increased by 10% in the last year, while consumer credit rose less than inflation, just two percent.

Certainly some people struggle to pay bills. For those concerned about the aggregate economy, though, the total statistics throw the most weight. On any given day, reporters will tell the story of some family in dire straits. Not making headlines, though, are the millions of people with jobs, buying things, paying their bills and saving something for the future.

In fact, people have kept a large portion of the stimulus payments they received back in the pandemic. I calculated the trend growth of savings before the pandemic and projected that trend into the years 2020 through 2024. Then I pulled data on actual savings. At its peak, excess savings (actual savings minus the projected trend line) totaled $2.6 trillion. What’s left? About $1.4 trillion. Other economists did similar calculations with somewhat different results, but there’s no doubt that consumers are, in general, in good condition going into the new year. And this view of past stimulus payments appears conservative relative to household checking account balances.
 

Risks to Consumer Spending

What could throw consumers off track? The risks include tariffs and international calamities. Although we cannot be certain about President-elect Trump’s future policies, we can be pretty sure that he will increase tariffs. Congress has granted the president wide authority in this area, so he won’t need to get votes on Capitol Hill. At this point we don’t know the details of what he will do, but we do know the most likely pattern. First, he’ll bluster, as he’s been doing since his election. Then he will impose high tariffs. Then he will negotiate with foreign leaders, cut a deal, and lower tariffs somewhat. That was the pattern in his first administration and his likely strategy in his second term of office. And he really enjoys negotiating, which comes across clearly in his book, The Art of the Deal.

But the initial impact of tariffs could be staggering to consumers. My fellow Forbes contributor Gene Marks quotes a study suggesting that laptop and tablet prices might rise by 46% after tariffs. Consumers don’t like price hikes. They will eventually accept the reality that they have to pay higher prices, but only after months of anger and refusal to spend.

Another risk to consumer spending in 2025 is international conflict. Plenty of locations could explode: Ukraine-Russia, the Middle East and the Straits of Taiwan top the list. Most international conflicts don’t impact U.S. consumers, but a serious fighting war with U.S. troops, or a nuclear detonation, would probably lead consumers to sit tight and see what develops.

The other usual risk for consumer spending—recession—appears quite unlikely. The latest Wall Street Journal poll of economists shows an average risk of recession of only 26%, and that will probably drop in the survey scheduled for mid-January.
 

Interest Rates And Consumer Spending

Interest rates can help or hurt consumer expenditures on cars, boats and other big-tickets items. My updated interest rate forecast shows level interest rates, as the Federal Reserve looks at solid job gains, stubborn inflation, continued deficit spending by the federal government, and reduced immigration that will limit growth of productive capacity. Most likely, interest rates will be neither a positive nor a negative for consumer spending in the year ahead.
 

Consumer Spending Forecast 2025

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 expect overly-exuberant spending on discretionary items in a level-interest-rate environment. Companies selling to consumers should also expect strong resistance to the purchase of those goods whose prices have been pushed up by tariffs.

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