Consumer spending ebbs and flows.
Traditionally, in periods of economic uncertainty, spending slows down. If you aren’t sure about the status of your bank account, you aren’t going to make frivolous purchases.
Likewise, when economic times are more stable, buying that car you’ve been eyeing is a little easier.
Needless to say, we are living in uncertain economic times.
Tariff impacts are still unknown, as numerous countries have yet to make a deal with the Trump administration…
The latest figures show inflation rising above the 2% target set by the Federal Reserve…
And interest rates remain elevated as the Fed has not made a benchmark rate cut since December 2024.
Those factors should point to a steady decline in consumer spending.
However, the data tells us otherwise…
Consumer Spending Normalizing After Initial Tariff Shock
In April, President Trump announced his plan to implement reciprocal tariffs against nearly every country importing goods into the United States.
Interestingly, while the stock market declined, consumer spending actually increased after the announcement:
Households Front-Load Amid Tariff Shock
Following a period of relatively flat spending leading into Trump’s announcement, American households increased their spending on goods and services by as much as 5% year over year.
We were buying before the sticker shock of these reciprocal tariffs came into focus.
If you’re in the market for a car, and you know the price of that car is going up 20% or more in two months, you’re going to do everything you can to buy the car now.
That’s what Americans did.
After that initial front-loading, consumer spending started to cool. We spent about as much on goods and services in May and June of 2025 as we did the year before.
What stands out, however, is what happened in July and August … We started to spend a little more again.
Despite the continued threat of tariffs and inflation still above 2%, we normalized our spending.
The bottom line is that consumer spending continues to be resilient… whether it should be or not.
But, to be clear, not every consumer sector is feeling the love…
Some Areas Thrive … Some Don’t
To date, broad consumer spending is up 2.4% year over year.
The 90-day average increase is 1.9%, so consumer spending momentum is up. However, that rising momentum is not felt in every spending sector:
Health, Electronics Among Sagging Spending Areas
The Bloomberg table above shows that spending is up in building materials, general merchandise, gas stations, and food and beverage stores.
However, essentials like health and personal care are experiencing a sharp decline. The 90-day average year-over-year increase in the category is 0.92%. However, spending on health and personal care is actually down -0.92% year over year.
On the discretionary side of spending, a big surprise is the 13.2% increase in water transportation/cruises.
It is the cruising season, but that’s a huge jump from the 90-day average increase of 6.1%.
Air transportation and accommodation spending are still down but trending slightly higher than the 90-day average.
The concerning part of discretionary spending is home furnishings, sporting goods and electronics/appliances.
All have seen year-over-year spending declines, and all are below their 90-day averages.
The picture becomes clearer when you look at it through the lens of which consumer spending areas are directly impacted by tariffs:
Tariffs Directly Impact Spending
This is the same data, just presented differently. This breaks down spending sectors by tariff impact.
Tariff hikes directly impact four of the five areas of decline in consumer spending, while tariffs indirectly impact health and personal care.
How Spending Impacts Stocks
To tie this into consumer staples and consumer discretionary stocks, I ran both sectors through Adam’s Green Zone Power Rating system.
I took an “X-ray” of both the SPDR Consumer Discretionary ETF (XLY) and the SPDR Consumer Staples ETF (XLP).
XLP Rates Firmly “Bearish”
XLP returns an overall rating of 37 out of 100 on Adam’s system. Here’s a breakdown of its factor ratings:
- Momentum: 37.
- Size: 8.
- Volatility: 66.
- Value: 42.
- Quality: 67.
- Growth: 45.
The sector is hampered by weaker Momentum, but its higher Volatility score suggests a lower downside and a little more consistency in price.
XLY Rates “Neutral”
XLY rates a “Neutral” 45 out of 100 on our system. It outpaces XLP on Momentum (50), Quality (75) and Growth (67).
However, its Volatility (49) is lower than that of XLP, which indicates some additional downside risk.
Bottom Line: We are not out of the woods regarding tariff impacts on consumer spending.
The longer the fight over reciprocal tariffs continues, the worse the situation becomes. I’m expecting the “stable” areas of motor vehicles, clothing and miscellaneous store retailers to become negatively impacted next.
That additional pressure could sink the ratings of both sectors.
Time will tell.
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets