The Coming Test for the Consumer Will Determine the Strength of the Economy

Personal consumption expenditures rose 0.6% last month. (Spencer Platt/Getty Images)

The American consumer is being put to the test and is so far standing tall.

But the consumer faces the same worries that vex the Federal Reserve—a wobbling job market and the threat of tariff-related inflation. So as the important holiday shopping season approaches, consumers’ willingness to spend and how they spend will be an important measure for the strength of the economy going into next year.

Spending through the summer has been strong, said Mastercard chief economist Michelle Meyer.

“It actually shows signs of acceleration,” she said.

The Mastercard Economics Institute forecasts a 3.6% increase in spending for the period between Nov. 1 and Dec. 24, down from a 4.1% gain last year.

Record high stock prices and gains in housing prices over the past several years have helped keep higher-end consumers spending.

Even with slowing job growth, the labor market continues to be supportive for now. “The fact that aggregate wage growth is holding up supports overall spend,” Meyer said.

Tariffs may prompt price increases that show up as higher retail sales. Economists expect it will take another six to 12 months to see how the impact of tariffs will roll across the economy.

Retailers and other companies have found ways to blunt the blow of tariffs, including by stockpiling goods.

A full assessment of consumer strength will require breaking down “price impacts versus real spending,” Meyer said. She is also watching to see whether consumers are spending based on discounts and promotions.

Some popular holiday goods will be subject to high tariffs. The Mastercard forecast notes that tariffs on Christmas trees and ornaments were more than 26%, as of July. They are mostly imported from China. Sweaters are also seeing a jump in tariffs, to 25.9% this July versus 15.4% a year ago. Tariffs on leather gloves were also higher—29.3% as of July, up about 10% from last year. Toys now have a tariff rate of about 20%. They weren’t tariffed last year.

Consumers may turn to gift cards and online sales to blunt the impact of tariffs, Meyer said.

She expects online spending to increase 7.9% during the holiday period.

“My sense is it could be even stronger because if you’re a consumer trying to navigate a higher price environment, you want as many choices as possible, and you want to have flexibility of what you purchase, where you’re purchasing it, and when you purchase it,” she said.

Holiday spending will coincide with an expected pickup in inflation for the end of the year, said Diane Swonk, chief economist at KPMG. Inflation will “be peaking during the height of the holiday season,” she said. “Depending on how many additional tariffs we get, it could peak later.” The core personal expenditures price index showed inflation at 2.9% in August on an annual basis. Swonk forecasts it to rise to 3.4% in the fourth quarter.

Consumers are a formidable force in the economy, and their spending drives two-thirds of U.S. gross domestic product.

“It is really only the folks in the top 20% of the distribution who are spending at a rate greater than inflation since the pandemic,” said Mark Zandi, chief economist at Moody’s Analytics.

There are signs that consumer strength may be cracking, Swonk said. Some higher-income consumers are trading down, with discount retailers reporting a shift in the type of buyers in their stores.

She said it appears lower and middle income consumers are struggling more with debt, adding that seriously delinquent home-equity loans, over 90 days, are at the highest level since 2015. Delinquencies on student loans, of 90 days or more, are at the highest level on record, at over 13%, she said.

Meanwhile, just 22,000 jobs were added in August, after massive revisions in government data showed far fewer jobs had been created than expected this year.

The Bureau of Labor Statistics said that its regularly scheduled review of jobs data found that the U.S. added 911,000 fewer jobs in the 12 months ending in March than previously thought.

“As long as businesses don’t lay off, we won’t see big negative numbers, and we won’t go into recession,” said Zandi.”

Economists are expecting an employment report due Friday to show just 50,000 new jobs. Immigration policies have impacted those numbers, creating less demand for jobs at the same time there is less hiring.

“It is this weird, tenuous balance. The demand and supply of workers have fallen in tandem. A healthy labor market has churn, and we don’t have churn,” she said. “The pockets of where people are going to be hit aren’t clear yet.”

The government may shut down this week, but that is only likely to affect the larger economy if it lasts for several weeks, Zandi said.

Tax cuts in legislation passed this summer will kick in next year. “I think the real vulnerability is in the next six to 12 months,” said Zandi.

“When you get into next year, you get the benefit of lower interest rates,” he said.

Still, Meyer said spending trends have been solid. “You’re not really seeing much in the way of the consumers shifting their behavior. I don’t want to underestimate the consumer,” she said.

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