- Making up nearly 30% of global share, US consumption is key for many exporters.
- Consumption remained strong in 2025 despite many uncertainties.
- Momentum however slowed in 4Q25.
- .The Fed has the tools to counter any incipient downside to consumption.
- Two rate cuts of 25bps each would likely be in store in 2H25.
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Commentary: Slowing US consumption
The US is a consumption powerhouse, making up nearly 30% of global consumption despite comprising of only 4.2% of the world's population. This explains why global manufacturers focus so much on the American market, and why during trade wars with the US, foreign corporates urge their authorities to sort out matters with Washington DC as quickly as possible. For a major exporter in Japan or South Korea, the mood of US consumers is more important than consumers anywhere else.
Thankfully, through trade wars and policy uncertainty, sticky inflation and geopolitical tussles, US consumption remained strong through 2025. We estimate a 4% growth in retail spending last year, highest in three years.
Consumption of goods and services makes up the bulk of US domestic demand. Although lately investment demand has begun to pick up, for US GDP growth, consumption is make or break. Consumption growth for 2025 was impressive, but there are early signs of some slowdown, especially when looking at the data from 4Q 2025. We estimate a progressively slower growth rate of retail sales from September onward, in various permutations of the data (e.g. including or excluding auto sales). The implication of this development is seen in real time GDP estimates. Atlanta Fed’s recent downward revision of US GDP’s Nowcast from 5%+ to 3%+ has been entirely due to the slowness in consumption growth.
Consumption trend, placed in context, does not appear worrisome. US household/GDP ratio has been falling for half a decade, net worth has gone up considerably due to the rise in stock market, and real interest rates have been declining due to Fed rate cuts. Aided by tax cuts from President Trump’s legislative measures from last year, consumption ought to remain resilient, even if it is not sustainable at the torrid rate of last year.
But a deeper wobble in the stock market, tariff passthrough to inflation, and uncertainties related to jobs could hurt the sentiment of consumers. Oil prices, low presently, could spike around US’s actions in the middle east, posing further downside to sentiments. Survey readings, such as the Michigan Survey, highlight a bifurcated economy. Those at the lower end of the income spectrum, with minimal exposure to stock market gains, are feeling particularly despondent. These numbers could worsen.
The authorities have tools to deal with such eventuality. The Fed has been under considerable pressure to cut rates from the White House in any case, and emerging downside risks to consumption would provide ample motivation. We have penciled in two Fed rate cuts this year, one in 3Q and one in 4Q. We don’t think inflation remaining well over target would be a constraint. Sub-2% inflation is unlikely to characterise the US economy for a while, in our view. Since the pandemic, the Fed’s aim seems to have been to run the economy “hot,” which we think would continue under incoming chair Warsh.
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