The Resilience and Limits of U.S. Consumer Spending Amid Inflation and Tariffs

The U.S. consumer, long the engine of economic growth, now faces a dual threat: inflationary pressures and a surge in tariffs that have reshaped spending patterns and investment dynamics. By 2025, the average effective U.S. tariff rate had climbed to 22.5%, the highest since 1909, driving a 2.3% short-run increase in consumer prices and an average annual household loss of $3,800 in 2024 dollars [1]. These tariffs, disproportionately borne by lower-income households—whose costs were 2.6 times higher than those of the top decile—have forced a recalibration of consumer behavior, with defensive sectors emerging as critical safe havens [1].

Tariff-Driven Price Shocks and Consumer Behavior

The Yale Budget Lab’s analysis underscores the regressive impact of tariffs, with sectors like apparel and textiles seeing 17% price spikes under 2025 policies [1]. J.P. Morgan Global Research notes that while gradual tariff implementation softened immediate economic shocks, the cumulative effect still weighed on domestic and global growth, with U.S. real GDP projected to shrink by 0.9 percentage points in 2025 [5]. The Federal Reserve’s real-time data further confirms this, showing a 0.3% rise in core goods PCE prices directly attributable to tariffs in early 2025 [3].

Consumer responses have been twofold: a shift toward value-oriented brands and a bifurcation in spending habits. Walmart and Costco captured 25% of retail sales through private-label offerings, while affluent consumers maintained spending on premium goods like Ralph Lauren [2]. Meanwhile, lower-income households cut back on discretionary items, with Deloitte projecting a 1.4% real spending increase in 2025 compared to 5.7% in 2024 [4]. This trend is compounded by a 35% drop in consumer optimism since December 2024, as reflected in the University of Michigan’s Consumer Sentiment Index [2].

Defensive Sectors: Utilities, Healthcare, and Consumer Staples

Amid this uncertainty, defensive sectors have gained traction. Utilities stand out for their inelastic demand and regulated business models. The Morningstar US Utilities Index surged over 10% year-to-date in 2025, driven by infrastructure investments and AI-driven energy demand [5]. Companies like PG&E and Portland General Electric are allocating $12 billion and $6.5 billion, respectively, to clean energy projects, ensuring long-term growth [1]. Regulatory frameworks allowing rate hikes further insulate utilities from volatility, though risks like rising interest rates and natural disasters persist [5].

Healthcare has also proven resilient, with Medtronic (MDT) and Intuitive Surgical (ISRG) reporting 3.5% and 19.2% year-on-year revenue growth, respectively [1]. Despite potential 200% tariffs on pharmaceuticals, innovation in AI diagnostics and telemedicine has offset some pressures [1]. Consumer staples, meanwhile, benefit from stable demand for essentials. Procter & Gamble (PG) and Costco (COST) have outperformed the S&P 500, with Philip Morris International (PM) posting a 44.89% one-year return [2]. However, the sector faces challenges from a strong dollar and margin pressures, trading at 21x earnings [3].

Long-Term Risks and Strategic Considerations

While defensive sectors offer stability, their limits are evident. The Yale Budget Lab warns that prolonged tariffs could reduce U.S. real GDP by 0.4–0.6% annually in the long run, equivalent to $100–180 billion in 2024 dollars [1]. The Congressional Budget Office cautions that escalating trade tensions might trigger a 6% GDP contraction by 2030, with middle-income families facing a $22,000 lifetime loss [2]. Investors must balance these risks against the structural tailwinds of energy transition and demographic-driven healthcare demand.

For now, defensive equities—particularly utilities, healthcare, and consumer staples—remain compelling. Their ability to generate free cash flow and withstand inflationary shocks makes them ideal for a landscape where growth stocks trade at elevated valuations [2]. Yet, as the Federal Reserve delays rate cuts amid tariff uncertainty, investors should prioritize companies with pricing power and diversified supply chains [3].

Source:
[1] Where We Stand: The Fiscal, Economic ... - Yale Budget Lab [https://budgetlab.yale.edu/research/where-we-stand-fiscal-economic-and-distributional-effects-all-us-tariffs-enacted-2025-through-april]
[2] The Resilient US Consumer: A Balancing Act Amid Tariffs [https://www.ainvest.com/news/resilient-consumer-balancing-act-tariffs-inflation-2508/]
[3] Detecting Tariff Effects on Consumer Prices in Real Time [https://www.federalreserve.gov/econres/notes/feds-notes/detecting-tariff-effects-on-consumer-prices-in-real-time-20250509.html]
[4] United States Economic Forecast Q2 2025 [https://www.deloitte.com/us/en/insights/topics/economy/us-economic-forecast/united-states-outlook-analysis.html]
[5] US Utilities Market Trends for 2025 [https://www.morningstar.com/stocks/us-utilities-market-trends-2025]