Consumer spending in the US is slowing – Is the economy in trouble?

For two years, the American consumer has carried the economy.

Even with interest rates at their highest level in two decades, spending kept climbing, job losses never came, and talk of recession faded.

But the latest data and company earnings are clear: the engine is no longer revving.

Although consumers are still spending, they are now doing it differently.

Some big earnings this week offered a rare look at what happens when the single most important force in the US economy starts to change direction.

A slowdown that is starting to stick

The headline numbers leave little room for debate.

Real personal consumption expenditures (PCE) grew just 1.2% annualised in the first quarter of 2025, sharply down from roughly 4% in the final quarter of 2024, according to a report by Deloitte.

Income is slipping, too. According to the Bureau of Economic Analysis, Personal income fell 0.4% in May, disposable income dropped 0.6%, and the savings rate is now just 4.5%.

This is the lowest since 2022, indicating that households are depleting their cash buffers rather than building them up.

While spending remains positive in aggregate, it is softening sharply in discretionary categories.

The data now matches what companies are reporting: households are cautious, selective, and prioritising only what they need.

Inflation and tariffs reshape household priorities

Inflation has cooled to around 2.7% year-over-year, but tariffs remain a potential shock.

A McKinsey survey shows 43% of consumers cite rising prices as their biggest worry, and 29% point directly to tariffs.

This sharp shift in sentiment is changing how households spend.

Consumers are delaying electronics and home goods purchases.

They are trading down to private-label products and buying cheaper “dupes” instead of premium brands, according to The Washington Post.

Even consumer staples are not immune. Procter & Gamble says shoppers are stretching the time between purchases and drawing down pantry stock before buying again.

This indicates a defensive posture from the US consumer.

Lower-income households are feeling it the most. Buy Now, Pay Later usage for groceries has spiked.

In fact, BNPL spend is set to reach record highs, surveys have shown that almost 1 in 4 users are relying on such payment methods to buy essential items.