Will Consumers Be Able to Rescue the Economy Again? The 2025 Crossroads

The U.S. economy is once again leaning on its most reliable crutch: the American consumer. But this time, the path is littered with potholes—from tariffs to rising inflation expectations—making the ride bumpy. Can consumers still pull off a miracle? Let’s dig into the data.

The Consumer Sentiment Rollercoaster

The University of Michigan’s Consumer Sentiment Index offers a mixed picture. After hitting a February 2025 low of 64.7 (a 9.8% drop from the prior month), sentiment staged a modest rebound in Q2. March saw a slight uptick to 89.2, followed by projections of 89.8 in April and 90.5 by June. While this suggests a fragile recovery, the underlying anxiety remains: consumers are bracing for tariffs and inflation spikes.

The shows this volatility. But here’s the catch: confidence isn’t translating into sustained spending. Front-loaded purchases in early 2025 to beat tariffs may give a temporary boost, but durable goods—a key driver of consumer spending—are already buckling.

Inflation: The Elephant in the Room

The Fed’s preferred inflation gauge, the PCE deflator, sat at 2.6% in late 2024, with CPI at 3% in January 2025. But here’s the red flag: consumer inflation expectations are soaring. The University of Michigan’s survey hit 4.3% in February, the highest since 2023, while the Conference Board’s gauge spiked to 6%.

The will be critical. If inflation stays above the Fed’s 2% target, rate cuts—the consumer’s lifeline—will be off the table.

Sector Split: Services Survive, Durable Goods Struggle

Consumers are prioritizing services over goods, a trend that could reshape the economy. Durable goods (cars, appliances, furniture) face a double whammy: tariffs and fading affordability. Projections show 2025 growth of 3.3%, but that plummets to 0.8% in 2026 as tariffs bite.

Meanwhile, services (restaurants, travel, healthcare) are holding up, with 2.8% growth in 2025. The highlights this divergence.

The Labor Market: A Glass Half-Full

Unemployment dipped to 4% in January 2025, but watch out: it’s projected to hit 4.5% by Q3. Deportations of undocumented workers—up 100,000 annually—could squeeze labor-heavy sectors like agriculture (42% of workers are undocumented).

The tells the story. Companies reliant on cheap labor, like fast-food chains or agribusiness, face rising costs.

Housing: A Drag, Not a Lifeline

Mortgage rates remain stubbornly high, with housing starts down 9.8% in January 2025. The Fed’s delayed rate cuts mean this slump could drag into mid-2025. The shows the pain.

Investors in homebuilders like Lennar or Toll Brothers should brace for a rough ride.

The Bull Case: Services and Tech

The real growth is in services and tech-driven sectors. Businesses investing in machinery and equipment (M&E) are seeing 2.3% growth in 2025, rising to 6.3% in 2026 thanks to tax incentives.

The highlights this shift. Tech stocks like Amazon (AWS) or cloud-based companies could thrive as businesses digitize to cut costs.

The Bottom Line: Consumers Can Help, But Don’t Bet on a Miracle

Consumers will prop up the economy—but only in select areas. Services, tech, and sectors insulated from tariffs (e.g., healthcare) are the plays. Avoid durable goods and housing unless rates drop sharply.

The numbers are clear: GDP growth of 2.6% in 2025 hinges on tax cuts and deregulation, not consumer heroics. With inflation expectations rising and tariffs looming, this recovery is a fragile thing.

Investor Takeaway:
- Buy the dip in services stocks (e.g., Starbucks, United Airlines).
- Avoid tariff-hit sectors like autos (Tesla, Ford) and homebuilding.
- Watch the Fed’s next move—if they can’t cut rates, brace for a slowdown.

The consumer isn’t dead, but they’re no longer the economy’s Superman. In 2025, they’re more like a marathon runner—steady but not unstoppable.

Final Word: The data screams caution. Play defense in your portfolio, and let the durable-goods bears feast on their own pain.