Zacks Investment Management

David A. from Destin, FL asks: Hi Mitch, there was a big headline in the news last week about consumer sentiment tanking. Do you see this filtering through to spending in 2025, which could be bad for the economy? If you have other information about consumer behavior and spending, that would be helpful to know as well. Thank you.

Mitch’s Response:

Thanks for writing, David. The headline you’re referring to was the University of Michigan’s latest consumer sentiment index reading, which showed a sharp -11% decline from mid-February to mid-March. Compared to a year ago, sentiment has plunged -27% and it is at its lowest level since November 2022—when consumers were reeling from higher inflation, interest rates, and a bear market.¹

I have written quite a bit recently about the impact that the current tariff policy has on uncertainty, which I think applies across the spectrum of investors, businesses, and consumers. So, I don’t think it should come as a surprise that consumer sentiment has been tracking lower as the market wobbles and trade battles are waged.

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In your question, you ask whether declining sentiment could filter through to spending this year, which could, in turn, hurt the economy. It is certainly possible. Consumers tend to become more restrained when they start worrying about future economic conditions and particularly, future inflation. To boot, we’ve already seen the lower- and middle-income cohort pulling back on spending—over the past year, high-income earners have increased expenditures by roughly 12%, while middle- and lower-income households have cut back on their purchases during the same period.

The average household’s credit card debt has also pushed higher, topping $10,000 (adjusted for inflation) for the first time since 2009. Consumers surveyed by the Federal Reserve estimated a 14.6% chance of missing a minimum payment in the next three months—the highest level since April 2020. In short, there’s a good reason to be cautious.

Now, to be fair, headlines have been warning of a “tapped out” U.S. consumer for years, and spending has remained strong. A surge in consumer loan delinquencies and late payments that took hold in 2022 rattled investors but turned out to be a false signal. Those delinquencies were concentrated in borrowers who assumed debt shortly after the pandemic, and banks have since tightened credit standards.

Delinquency Rates on Consumer Loans

Broadly speaking, households remain in strong financial shape. Debt service payments as a percentage of disposable income—which is a key metric signaling the availability of discretionary income—currently sits at 11.2%. This is in-line with the 45-year average of 11.1%, indicating that consumers are not being weighed down by debt—an important point.

At the end of the day, the metric that lenders (banks) rely on most in their credit modeling is employment. Right now, the U.S. economy continues to have a relatively strong and steady jobs market, with an unemployment rate hovering around 4% and monthly payroll gains consistent with 2.5% GDP growth. This is one of the key metrics that I think investors should focus on in the coming months, which will also provide insight as to what to expect from consumers in 2025.

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