The Diverging Fortunes of Capital Spending and Consumer Spending in a Fragmented U.S. Economy

The U.S. economic recovery from 2023 to 2025 has unfolded as a tale of two forces: resilient consumer spending and a cautiously optimistic surge in capital investment. While these trends reflect the nation's adaptability, they also underscore a fragmented recovery marked by divergent risks and opportunities. For investors, understanding this bifurcation is critical to navigating a landscape where regional disparities, sector-specific dynamics, and policy shifts shape outcomes.

The Resilience and Constraints of Consumer Spending

Consumer spending, which accounts for roughly two-thirds of U.S. GDP, has shown surprising durability despite headwinds. According to the Congressional Budget Office, real consumer spending grew by 1.3 percent in 2023 and is projected to expand by 2.0 percent in 2025, driven by robust disposable income growth and savings from middle- and high-income households. However, this optimism is tempered by a sharp decline in consumer confidence. By late 2025, only 39 percent of consumers expressed intent to splurge, while 75 percent reported "trading down" in at least one category, citing inflation, healthcare costs, and economic uncertainty.

The Visa report highlights a nuanced outlook: nominal consumer spending is expected to grow at a 4.8 percent year-over-year rate in 2025, normalizing near pre-pandemic trends. Yet this growth is uneven. Lower- and middle-income households face heightened financial strain, while affluent consumers continue to drive discretionary spending. Morgan Stanley forecasts a slowdown in consumer spending growth, from 5.7 percent in 2024 to 2.9 percent in 2026, as tariff-induced inflation and a cooling labor market weigh on aggregate demand.

Capital Spending: A Glimmer of Optimism Amid Headwinds

In contrast, capital spending has emerged as a bright spot. The CBO projects real business fixed investment to rise by 3.5 percent in 2025, with equipment and residential investment growing by 6.5 percent, fueled by pent-up housing demand and declining mortgage rates. A key driver is the One Big Beautiful Bill Act, which allows full expensing of capital expenditures through 2028, reducing corporate tax burdens and incentivizing reinvestment according to RKLCPA. Deloitte notes that AI-related sectors, in particular, are poised for strong investment despite inflation and higher interest rates according to Deloitte.

However, risks loom. Elevated borrowing costs and reduced immigration-limiting labor supply-could temper capital spending. Deloitte warns that a "downside scenario" with persistent tariffs and weak immigration could trigger a recession by late 2026, with business investment declining by 2.3 percent in 2027. Conversely, a reduction in tariffs and stronger immigration could bolster consumer resilience, with real consumer spending growing by 1.9 percent in 2026.

Sector-Specific and Regional Divergences

The recovery's fragmentation is starkly evident in sector and regional dynamics. Consumer-facing sectors like retail and leisure have outpaced others, particularly in the South, where domestic in-migration and a low cost of living have driven job growth according to Visa. In contrast, the Midwest struggles with manufacturing and agricultural headwinds, while the West faces a slowdown due to tech job losses and tariff pressures according to Visa.

For investors, this divergence creates both risks and opportunities. Sectors tied to capital-intensive industries-such as AI, housing, and equipment manufacturing-offer growth potential, especially with tax incentives. Conversely, consumer sectors reliant on discretionary spending face volatility as households trade down. The Northeast's financial and healthcare sectors remain resilient, while the South's retail and leisure industries present untapped growth according to Visa.

Navigating the Bifurcated Recovery

The U.S. economy's path forward hinges on balancing these divergent forces. For investors, the key lies in hedging against uncertainty:
1. Capital Spending Opportunities: Prioritize sectors benefiting from tax incentives and technological adoption, such as AI and residential construction.
2. Consumer Sector Caution: Focus on essential goods and services, as discretionary spending remains vulnerable to inflation and policy shifts.
3. Regional Diversification: Allocate capital to regions with structural advantages, such as the South's demographic trends, while avoiding overexposure to struggling regions like the Midwest.

As the CBO notes, real GDP growth is projected to accelerate from 0.9 percent in 2023 to 2.4 percent in 2025. Yet this growth is uneven, shaped by policy, demographics, and global trade dynamics. Investors who recognize this bifurcation-and adapt accordingly-will be best positioned to capitalize on the opportunities while mitigating risks in a fragmented recovery.