Month: May 2025

Consistent Spending Habits?

Compared to March 2025, during the month of April US consumers earned a bit more, spent a bit more, saved more than in recent months, and spent less on a wide array of durable goods. Despite still robust demand (see first chart below) — and uncertainties related to supply — the year-over-year PCE price index was up only 2.1 percent overall and 2.5 percent excluding food and energy.

Several observers interpreted these results as related to tariff turmoil. For example, Reuters reported, “Spending was supported by outlays on services, mostly housing and utilities, healthcare as well as restaurants, hotels and motel stays. But goods spending softened amid cutbacks on purchases of motor vehicles and parts, clothing and footwear as well as recreational goods and vehicles. Pre-emptive buying of goods ahead of Trump’s sweeping import tariffs helped to push spending higher in the prior month.”

According to the Bureau of Economic Analysis in April 2017 US consumers expended $11,752.7 billion on goods and services. Adjusting for inflation and calculated in constant 2017 dollars, in April 2025 US consumers expended $16,173.4 billion on goods and services. (See table below.) This is just about one-fifth more (again, inflation adjusted).

Given this significant increase in spending, pre-pandemic versus post-pandemic, and tariff-related uncertainties, I would not have been surprised to see a shift in the mix of goods and services being consumed. Instead, the available data demonstrates remarkable continuity. In the table below the US consumer’s shopping cart for durable goods, non-durable goods, and services is reported and compares 2017 versus 2025. Very different moments in time, very similar spending habits.

Deep Pockets

According to the US Census Bureau (Department of Commerce), “Advance estimates of U.S. retail and food services sales for April 2025, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $724.1 billion, up 0.1 percent from the previous month, and up 5.2 percent from April 2024.”

Bloomberg reported on some of the perceived behavioral shifts, “Growth in US retail sales decelerated notably in April, reflecting consumers pulled back spending on cars, sporting goods and other categories of imported goods amid concerns about rising prices from tariffs.” Many media reports reflect this concern regarding tariff-related price increases. It is a plausible claim. Personally I am not as certain regarding the mix of consumer motivations.

It is interesting that spending at food service and drinking places was up 7.8 percent from April 2024. Apparently, many folks were not averse to increased discretionary spending. The red line on the first chart below reflects continued strong grocery store purchases. The very slight decline from the March all-time-high might mostly reflect the increased number of meals eaten out.

April retail inventory numbers (see second chart below) do not suggest significant consumer-facing stockpiling. Even the opposite could be reasonably discerned — at least given the ratio of inventories to sales. Inventories may be fatter upstream. But at the consumer level, April sales were stable and inventories declined.

One usually credible observer headlined, “Retail Sales Muted in April as Front-Loading Fatigue Sets-In.” Entirely possible, but consumer satiation could also be hypothesized. The US is now four years into consumer spending climbing higher. Even without the early post-pandemic bounce, this spending boom has been remarkable. In April 2022 US consumers spent just a bit over 660,000 million dollars. Last month we spent just over 724,000 million dollars (not inflation-adjusted). Since 2022 I have not increased my personal spending by one-tenth (plus). Have you?

Last weekend the United States and China decided on a 90-day pull-back from mutual no-flow tariff rates.

On Tuesday Doug McMillon, chairman and CEO of Walmart explained, “Our short and longer-term opportunities are clear. The immediate challenge is obviously navigating the impact of tariffs here in the US… I want to thank President Trump and Secretary Bessent for the progress made recently. We’re hopeful that it leads to a longer-term agreement between the US and China that would result in even lower tariffs. We will do our best to keep our prices as low as possible. But given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure given the reality of narrow retail margins.” A bit later the CFO added, “There are certain items, certain categories of merchandise that we’re dependent upon to import from other countries, and prices of those things are likely going to go up, and that’s not good for consumers.” Otherwise Walmart was reporting a stellar first quarter.

I perceive a US economy and related consumer behavior with remarkably robust spending habits. Enormous value is being generated. Enormous value is being offered. Enormous value is being exchanged. Somewhere between ten and twenty percent tariff-rates the flow of value will shudder hard and on some product categories basically stop. The higher the percentage, the quicker and more complete the stop. The more stops, the more collateral damage to everyone along the flow network. It is good that the maximum rates have been lowered for the next 90 days. June is not far away. We can see the future from here. The details may still be a bit obscure. New details may yet emerge. But the lay of the land is clear enough (more).

Demand Shock or Supply Shock?

Wednesday morning on Bloomberg Surveillance (see video link below), Frances Donald, chief economist with the Royal Bank of Canada, highlighted the potential risk of “… dysfunctions in the supply chains that leads to more problematic developments this year.” She emphasized, “… when you start to mess with supply and demand dynamics within supply chains, when you have ships that stop coming to shore, it is not a one month fix. Sometimes it can take months or years to recalibrate supply and demand.” In response to one question, Ms. Donald offered that there will be supply shortages in the United States based on what has happened over the last month — made better or worse by what is still ahead.

I spent the last ten days in Europe. I expected to be asked to explain or even justify US policy.  Not really.  The Europeans with whom I met understand what is happening and why.  They are amazed at the self-harm being done, but are not in denial regarding what has happened — thus far.  I am still processing what I heard last week.  But here’s a “concise” take-away that I have circulated with some of my discussion partners.

Demand will still decide.  Products will be produced (or not) and flow (or not) depending on expressions of effectual demand.  Where demand can return costs-plus, there will still be flow.  When and where demand cannot return that plus, there will not be flow. Ten percent higher tariff-related costs will not, alone, shift flows much. Twenty-percent?  Probably depends on the product.  Forty-percent?  Well, we (Europeans) will sell much more to other places and people… and probably much less overall.  Americans have been very robust consumers.  We will miss them.  

So far, I have certainly received more nuanced characterizations. But no one fundamentally disagrees with this reductionist summary.

I have not yet heard back from one German business leader who asked all of us around the table, “Are we in denial? Have we decisively shifted into an autarkic global reality, but are emotionally unable to read the writing on the wall?  Or are we carefully watching foolish posturing that still has a chance of being substantively reversed and we want to reward — and rewarded by –the reversal?  Will we know by the end of this year?” 

No one volunteered an answer to these questions.  Everyone I could see pursed their lips.

US Demand Persists in March

According to the Bureau of Economic Analysis, “Personal income increased $116.8 billion (0.5 percent at a monthly rate) in March… Disposable personal income (DPI)—personal income less personal current taxes—increased $102.0 billion (0.5 percent) and personal consumption expenditures (PCE) increased $134.5 billion (0.7 percent). Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—increased $136.6 billion in March. Personal saving was $872.3 billion in March and the personal saving rate—personal saving as a percentage of disposable personal income—was 3.9 percent.”

Bloomberg summarized, “US consumer spending jumped in March while a key measure of inflation decelerated…” US consumers spent more on almost every major category of goods and services, with a big surge in automobile purchases (see first chart below). Suspicion also surged that the principal tail-wind for this increased consumption is widespread expectation of tariff-related price increases. Freight volumes and values were well off January bottoms and consistent with same-month results over the last decade (with the dramatic exception of March 2020). April flash-results have not — yet — been in free-fall (here and here and here). Bloomberg called the March outcomes “a welcome reprieve before tariffs are expected to broadly drive up prices.”

Below I display a couple of long-tailed charts. The blue line tracks total inflation-adjusted Personal Consumption Expenditures. The red line tracks real PCE for Food-at-Home. There are many indicators (here and here) suggesting consumer confidence is low, moving lower, and expectations are for choppy or worse economic conditions ahead. The surge in automobile purchases can be interpreted as reflecting these expectations. My personal assessment of what’s ahead — if current tariff policies persist — shares this pessimism. But despite all the turmoil, uncertainty, and very real challenges, through the end of March robust demand continued to pull robust flows of goods (and services).