Consumers spent far below expectations in January as the nation holds its breath to see how Trump’s tariffs play out.
The U.S. Bureau of Economic Analysis reported personal consumption expenditures dropped to $30.7 billion (0.2 percent) from December, while personal income increased 0.9 percent, mainly fueled by social security payments.
The surprising drop in spending is the biggest in two years, reflecting shaky consumer sentiment in the early days of 2025, and further indicating how Trump’s policies could harm the economy more than expected.
Experts didn’t foresee the nail-biting halt in consumer spending.
“We haven’t seen that in a while,” said Marc Giannoni, chief US economist for research at Barclays Bank. “We’ve had very solid consumer spending for a long time. This one was a big drop.”
Car sales were an early indication that consumers weren’t confident in the market.
“That’s a pretty good tip off that spending’s probably going to be weak,” said Christopher Low, chief economist at FNH Financial.
$41.1 billion in motor vehicles and parts stayed in lots and warehouses this January. Tariffs on parts from Canada and Mexico, where the US imports more-than-half of its parts from would push automobile prices up thousands.
The University of Michigan’s Surveys of Consumers showed sentiment dipping in the early days of January, a soft reflection of how spenders were worried about the new administration’s economic policies. Today’s personal income release is the first hard indication that money isn’t flowing like in the last two years.
The January indicator will be the last to reflect what is, so far, apprehension. From here on out we’ll see the actual impact.
In January, the inflation rate was 2.5% year-on-year, as expected.
“That’s going to serve as a baseline in the markets and among economists as we try to judge the effects of tariffs on inflation going forward,” said Low.
“This is the last month that is entirely clean of those tariff-effects.”
The Congressional Budget Office forecasted a cooling GDP growth of 1.9% over 2025, but January’s 0.2% drop in expenditures could mean an even colder year.
“The slowing is taking place a little faster than initially anticipated,” said Giannoni.
If the release is a sign of things to come, we can expect a lot of shocked economists in the coming year.
