Increased trade policy uncertainty around tariffs has led to lower household spending by American consumers in the first half of 2025, according to Fitch Ratings’ latest US Consumer Health Monitor.

Fitch Ratings’ latest US Consumer Health Monitor reports that American consumer spending slowed in early 2025 amid rising trade policy uncertainty and tariff pressures. Higher costs from tariffs are fuelling inflation risks, raising fears of potential stagflation later this year, said Olu Sonola, Head of US Economic Research at Fitch.

The report says that US consumer spending slowed significantly in the first half of 2025, decelerating from the robust pace seen in late 2024. The report said that increased trade policy uncertainty and equity market volatility weakened consumer sentiment and confidence, leading to lower household spending. A cooling labour market further constrained household income.

“As tariff-related cost pass-throughs to goods increase inflationary pressure, the economy could take a stagflationary turn later this year,” Olu Sonola said.  “Higher prices are expected to hit goods categories first, likely weakening consumer spending ahead of the holiday season.”

Fitch also warned that a cooling labour market could curb further gains in consumer confidence, compounding the spending slowdown. These factors suggest households may remain cautious, with broader economic growth facing headwinds as inflation and weaker job prospects weigh on sentiment and purchasing power in the months ahead.

Cooling Labour Market

According to Fitch, consumer spending growth dropped to 0.5 per cent in 1Q25 and 1.4 per cent in 2Q25, down from 3.7 per cent in 3Q24 and 4.0 per cent in 4Q24. Services spending slowed, rising just 0.6 per cent in 1Q25 and 1.1 per cent in 2Q25. Durable goods spending declined by an annualized 3.7 per cent in 1Q25. Goods spending has remains volatile due to the tariff shock. Fitch expects consumer spending growth to average 1.8 per cent in 2025–2026, a significant drop from 2.8 per cent in 2024.

The report says that consumer net worth fell by 0.9 per cent in 1Q25 as tariff concerns weakened equity market performance. However, U.S. Federal Reserve data shows consumers maintained steady liquidity despite tariff-driven market turbulence, with deposits accounting for roughly 10 per cent of total assets.

According to the Fitch report, US household real estate equity declined after peaking in 2025 as home prices softened. “The US housing market has cooled due to elevated mortgage rates and ongoing affordability constraints,” it says.

And though consumer confidence and sentiment bounced back in May after a steady decline from December 2024 to April 2025, a cooling labour market will likely limit further gains in consumer confidence, Fitch warned.