Quick Overview

  • The Conference Board said U.S. consumer spending may contract in the first quarter for the first time since the pandemic, weighed down by rising prices and declining household confidence.
  • The agency said that after growing 4% in the fourth quarter,inflation-adjusted consumer spending in the first quartermay decline at an annualized rate of 0.2% quarter-over-quarter.
  • "This shift reflects that consumers are facing difficult choices amid rising prices," said Yelena Shulyatyeva, senior U.S. economist at the Conference Board, in the report. "If inflation continues to climb, consumers may become more cautious and further tighten their purse strings."

Deep Insights

Data released by the U.S. Bureau of Economic Analysis on Friday showed that price pressures intensified in February, with consumer spending rising only 0.1%, below market expectations. This data has heightened concerns that the economy may fall into a situation of weak growth coupled with rising inflation.

Excluding volatile food and energy prices, the Personal Consumption Expenditures (PCE) price index—the Federal Reserve's preferred inflation gauge—accelerated to 2.8% year-over-year in February from 2.6% in January. The Fed aims to keep inflation at 2%.

Shulyatyeva of the Conference Board said in a statement that the rise in the so-called core PCE "may be a prelude to larger increases in the coming months, as tariffs will gradually seep into consumer price data through direct effects or through the transmission of rising inflation expectations."

She noted that in recent months, consumers have increased purchases of goods in anticipation of impending import tariffs, but have simultaneously cut back on spending at restaurants and other non-essential items.

"Stockpiling goods ahead of potential tariffs could lead to a pullback in goods spending later this year—once those touted tariffs actually take effect," Shulyatyeva said.

U.S. President Donald Trump has imposed or threatened tariffs on steel, autos, aluminum, and other goods from major exporters including Canada, China, Mexico, and the European Union. He has said he plans to announce reciprocal tariffs targeting most of America's trading partners on Wednesday.

Shulyatyeva believes that the combination of rising prices and slowing growth will pose a challenge to the Federal Reserve—which has a congressional mandate to achieve maximum employment and price stability.

However, she said that ultimately, slowing economic growth could dampen inflation and prompt the central bank to ease monetary policy in the second half of 2025.

"Unless long-term inflation expectations become unanchored, we expect the negative impact on growth to outweigh the impact of higher inflation, prompting the Fed to lower its policy rate in the second half of 2025," Shulyatyeva said.

Federal Reserve officials on March 19cut their 2025 economic growth forecast to 1.7% from 2.1% in December, and many private-sector economists have followed suit in lowering their expectations.

Monthly surveys by both the Conference Board and the University of Michigan this year have shown declining consumer optimism and growing concerns about price pressures.