Can the Consumer Still Save the US Economy?

During the post-pandemic recovery, the US consumer has acted as the economy’s shock absorber, sustaining growth. Even as interest rates rose and inflation squeezed household budgets.

But that story may no longer ring true.

Instead, momentum is now fading as we head into the final weeks of the year.

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In March this year, Federal Reserve Chairman Jerome Powell suggested “consistent growth” in the economy “has been supported by resilient consumer spending.” But that could be changing.

Inflation, the rate of price growth, is elevated. It reflected a year-over-year growth rate of 3.0% at the end of September. That is on top of an outsized run-up in prices from 2020 to 2024. That period saw the Consumer Price Index (CPI) grow by 23.6%, directly increasing the cost of living in the country.

Earlier in the cycle, strong job growth and excess savings allowed consumers to absorb higher prices. But now? The cushion is thinner. And elevated prices are hitting consumers harder with many paring back spending before the holiday season even arrived.

According to the Bureau of Economic Analysis, consumer spending rose marginally, up by only 0.3%, in September. What the numbers don’t say, though, is that the spending increase was largely due to higher prices rather than greater purchasing activity.

As economist Kathy Bostjancic says, “many consumers, especially middle- and lower-income households, face widespread affordability issues that force them to be more cautious and value-based shoppers.” With consumption accounting for over two-thirds of US gross domestic product (GDP), even a slight slowdown in spending makes a difference.

Already, early holiday data is mixed. The tone is shifting away from “strong” especially for those lower-income earners. As Bank of America Institute outlines:

Reuters recently reported “several companies… signaled soft demand during the holidays,” reflecting a softness in consumer spending habits.

A survey of 4,000 participants by PwC found shoppers planned to spend about 5.3% less than last year. Now, they are expecting holiday spending of around $1,552 per person.

While the rate of spending is slowing, the consumer is far from breaking. And that distinction matters. When spending growth decelerates, it often shows up first in the internals. This means income-tier splits, discounting behavior, and reliance on promotions. All of which we have seen lately.

December is the final test of that dynamic. If what is normally the strongest spending month of the year can’t re-accelerate demand, it suggests the consumer’s role as the economy’s shock absorber may be fading.

The December retail sales data, once released, will tell us whether the holiday season finished strong. Or if spending is actually pulling back. Keep an eye on the data, which will come out next month.

Also, watch for earnings guidance from major retailers for signs of demand pressure or margin strain. This will give us a clue about what to expect during the upcoming Q4 earnings season.

The US consumer hasn’t collapsed. But signs of strain are becoming harder to ignore.

Early holiday data suggests spending momentum is no longer accelerating. And that matters when the economy is still leaning heavily on household demand. If consumers finally pull back, the question shifts from “how long can growth last” to “what is going to replace it?”

— Lauren Brown
Editor, American Ledger

Sources:

Board of Governors of the Federal Reserve System, March 2025 https://www.federalreserve.gov/newsevents/speech/powell20250307a.htm

Federal Reserve Bank of St. Louis, December 2026 https://fred.stlouisfed.org/series/DPCERE1Q156NBEA

Bureau of Labor Statistics, October 2025 https://www.bls.gov/news.release/cpi.htm

USDA Economic Research Services, February 2025 https://www.ers.usda.gov/data-products/chart-gallery/chart-detail?chartId=58350

Reuters, December 2025 https://www.reuters.com/world/us/us-consumer-spending-moderates-september-2025-12-05/ 

Bank of America Institute, December 2025 https://institute.bankofamerica.com/economic-insights/consumer-checkpoint-december-2025.html

Reuters, November 2025 https://www.reuters.com/business/retail-consumer/us-holiday-sales-growth-be-muted-this-year-forecasts-show-2025-10-06/

Reuters, September 2025 https://www.reuters.com/business/retail-consumer/us-holiday-spending-set-steepest-drop-since-pandemic-pwc-survey-shows-2025-09-03/

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