Recent data has suggested the U.S. consumer could be weakening a little. Nonetheless, nowcasts continue to imply strong overall U.S. gross domestic product growth in Q1.
Consumer Concerns
Concern for the U.S. consumer comes from retail sales falling 0.9% on a seasonally adjusted basis for January compared to December. In addition, consumer confidence fell almost 10% for February according to the University of Michigan Surveys of Consumers.
However, this survey data may be more of a forward-looking assessment, with consumers expressing apprehension about the potential impact of tariffs, rather than reacting to immediate economic conditions. In addition, survey assessments divided along political lines with Republicans maintaining some optimism, while Democrats and Independents were less sanguine.
Home sales for January have fallen, though January is a seasonally slow month. With all of these readings, more data may be needed to determine any signal from the noise.
Robust Q1 Growth Expected
Despite some early signs of a weakening consumer, Q1 growth is forecast to be robust. GDPNow is pointing to annualized economic growth in Q1 of a little over 2% according to the Atlanta Federal Reserve’s estimate. A similar model from the New York Fed is calling for almost 3% annualized growth. These are healthy estimates and not necessarily consistent with a weakening U.S. consumer, which makes up the bulk of the U.S. economy.
Upcoming Data
Much is likely to depend on upcoming data. Aside from Chinese tariffs, which have risen, many other tariffs have been discussed but not yet implemented. If they are implemented as planned there will be a lag before the economic impact can be fully gauged. Similarly government layoffs and any corporate reaction to them is not apparent in unemployment reports yet. It may be March or even April before an initial impact from recent government proposals and actions can be fully assessed.
The Market’s Reaction
The stock market has not expressed major concern to date. Consumer discretionary stock indices would likely be tuned in to any consumer weakness. Admittedly these indices have fallen in recent days, but remain similar to levels from early January and well up year-over-year.
Forecasting market Kalshi’s probability of a 2026 recession is at 26%. That’s not too different to a typical year, although it is up a little from January.
What To Expect
Currently there is fear among some consumers that the economic environment may worsen and certain individual economic datapoints are not encouraging. However, Q1 data suggests that growth for the quarter is likely to be relatively robust. For now, it is hard to read much into a few soft datapoints from January into February, since these are less important months for many sectors.
Nonetheless, upcoming economic reports will be closely watched as the one-off readings for early in the year may have the potential to look more like a trend if softness continues. February’s jobs report comes on Friday March 7 and retail sales for February will be released on March 17. The Fed will announce interest rates on March 19 after the next Consumer Price Index report on March 12. No change in rates is expected, but the Fed will share its latest projections for how it expects 2025 to play out, informed, in part, by whether it sees inflation trending toward its 2% annual goal.
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