NEW YORK — Amid mounting fears about confidence in the economy, new data on household spending presents a grim reality: consumer spending dipped in January, suggesting that uncertainty is translating into tighter purse strings.
Households decreased spending by 0.2 percent in January, the Commerce Department said Friday, dashing hopes that the strong spending from 2024 would continue in the new year. The slowdown was broad based: consumers decreased or slowed spending on both goods and services.
A decrease in spending was expected, but economists were surprised by the precipitousness of the drop. That reactiveness on the part of consumers doesn’t bode well in an environment of volatile economic policy, with the details of President Trump’s tariffs, trade wars, and layoffs changing quickly.
While it’s too soon to say for sure which of those proposed policies is weighing more heavily on consumers’ minds, the uncertainty over rapid change in and of itself is a major influence on decreased consumption.
“Pick a number – you have government layoffs, tariffs, and already the world economies, Europe, China, are not behaving very well,” said Stan Shipley, Managing Director Fixed Income Strategist at ISI Group. “So this is not the time for us to have a shock.”
President Trump has announced steep tariffs on many of America’s closest trading partners, which economists say would ultimately raise the prices of imported and domestic goods for consumers. So far, his administration has only carried out some of those levies, but if it does impose tariffs on Canada, Mexico, and Europe, those price increases would not play well with more “price sensitive” consumers.
“Tariffs create a great deal of uncertainty for business. The prices of the goods and services that they have imported from overseas are gonna be much higher. That’s not gonna be good for the consumer,” said Shipley.
Economists also noted that a relatively cold January combined with destructive Los Angeles wildfires were both likely contributors to the depression in spending.
Meanwhile, income increased 0.9 percent, higher than anticipated, though that increase is partly due to an increase in Social Security payments, which increase every year to keep up with inflation.
Either way, those adjustments did not bolster consumers, who decided to take that money to the bank, resulting in a personal savings rate of 4.6 percent, an increase from last month and from the same time last year.
Just one month ago, analysts were wringing their hands over a slight uptick in inflation. After Friday’s report, as inflation slowed slightly to 2.5 percent in January as expected, inflation seems to be the least of their worries.
The steady inflation rate is “a good sign that maybe inflation expectation doesn’t have to grind higher too much more here,” said Shipley.
Despite that silver lining, January’s rapid decrease in real spending by American households has raised alarm bells for the economy, which was by almost all measures strong just two months ago.
“I don’t think it’s really good for anybody. Dropping consumer confidence, likely related to fears of tariffs, is bad for business,” said Marc Giannoni, Chief US Economist at Barclays Capital Inc. “I struggle to find someone who benefits.”
Seeing that waning consumer confidence is materializing in spending decreases is particularly concerning, said Giannoni, since “there doesn’t seem to be a resolution to the uncertainty. Whether it’s about trade or employment for government employees for instance, all of these things are weighing on the sentiments.”