US Economy Faces New Challenge as Consumer Spending Slows Post-Tariff Surge
After a period of robust consumer spending driven by fears of rising prices due to tariffs, the US economy is now showing signs of cooling. Recent data from Bank of America indicates that this surge in spending may have run its course, potentially setting the stage for economic stagnation or even a mild recession.
Earlier this year, US consumers responded to the threat of increased tariffs—particularly under former President Donald Trump's trade policies—by ramping up their purchases. However, that momentum appears to be fading fast. According to Bank of America’s credit card data, spending growth has been flat in early May, following a slowdown in late April.
From Spending Surge to Spending Stall
Retail sales edged up by just 0.1% in April, a sharp drop from the 1.7% increase recorded in March. Bank of America noted that year-over-year spending growth fell from 1.1% in March to 1% by late April. By May, it had essentially flattened, showing no annual increase.
"With ongoing uncertainty surrounding tariffs and potential price hikes, we are closely monitoring consumer behavior," Bank of America economists wrote, noting that the earlier wave of preemptive purchases by consumers is likely over.
Implications for the Broader Economy
This pullback in spending is significant. Consumer activity accounts for over two-thirds of the US GDP and has been a key driver of economic resilience in recent years. Now, economists are warning that any sustained slowdown in consumption could have a ripple effect across the economy.
Torsten Sløk, Chief Economist at Apollo Global Management, identified weakening consumer demand as one of the top risks to the US outlook. Speaking to Bloomberg, Sløk warned that persistent inflation and slower growth could create a stagflation scenario—a mix of stagnation and high prices.
Meanwhile, Doug Ramsey of The Leuthold Group cautioned that deteriorating consumer sentiment could trigger a “self-fulfilling confidence collapse.” Rising concerns about inflation and unemployment could lead consumers to cut back even further, dragging GDP growth down from roughly 3% to near zero, he said.
Businesses Brace for Impact
Companies appear to be adjusting to this shift. Hiring intentions are down, according to recent regional surveys from the Federal Reserve. Unemployment claims have also ticked higher. Samuel Tombs of Pantheon Macroeconomics noted that companies are likely to accelerate layoffs and slow hiring as consumer demand weakens in the third quarter, especially as tariff-related price increases take effect.
Pantheon also suggested the economy may enter a period of stagnation—characterized by flat growth—though it believes the US will likely dodge a full-blown recession.
Recession Risks Lower, but Still Present
As trade tensions between the US and China have eased, some economists have become more optimistic. Goldman Sachs has trimmed its 12-month recession probability from 45% to 35%, while JPMorgan believes the risk has dipped below 50% but remains elevated.
For now, the US economy stands at a crossroads. Whether consumer spending rebounds or continues to slide will play a crucial role in shaping the path forward.