Consumer Concerns Rise Amid Stubborn Inflation and Weak Spending Rebound
Weekly Economic Review: March 28, 2025
Consumers are concerned about the economy and higher inflation expectations; Personal income grew modestly, but consumer spending rebounded less than expected with reduced spending on services and increased savings; Core inflation rose, raising concerns about stagflation or recession
The week began with reports of weakening consumer confidence, which dropped in March to its lowest point in four years, driven by fears of a recession and rising inflation due to tariffs. The percentage of consumers expecting a recession stayed steady at a nine-month high. Optimism about future income largely disappeared after remaining strong in recent months, indicating that concerns about the economy and labor market are now affecting personal financial outlooks. It doesn’t really matter whether consumers are right or wrong about the labor market or the likelihood of a recession. If they change their spending habits based on those expectations, it will have a significant impact on the economy, and could make fears of a recession or a labor market decline self-fulfilling.
Personal income for February exceeded expectations and surpassed the previous month’s figures, primarily due to one-time settlement receipts. Without these settlements, February’s personal income would have shown only moderate growth. Consumer spending was weaker than anticipated in February, driven by increased spending on goods such as motor vehicles and parts, and recreational goods and vehicles. This suggests that some consumers are purchasing ahead of anticipated tariff-related price hikes. Conversely, spending on services like food services and accommodations decreased for the first time in three years. As a result, consumers saved more, pushing the personal saving rate to its highest level since June 2024.
Both monthly and annual Core Personal Consumption Expenditure (PCE) inflation measures exceeded expectations and the previous month’s figures, indicating persistent inflation.
Let’s examine in more detail the Conference Board’s Consumer Confidence Index and survey results, as well as the PCE price index, personal income, and personal spending data announced last week.
Consumer Confidence: The Conference Board announced that its Consumer Confidence Index, which measures consumers’ assessments and expectations regarding business conditions, income, and the labor market, came in lower than expected, declining by 7.2 points in March to 92.9. The decrease was led by consumers over 35 years old, and was broad-based across every income group except for consumers earning more than $125,000 a year.
Consumers’ expectation for the next six months declined 9.6 points to 65.2, the lowest level in 12 years. Consumers’ perceptions of the current labor market improved slightly, with the survey’s so-called labor market differential (views on whether jobs are plentiful or hard to get – a metric closely followed by the market to gauge labor market strength) increasing slightly to 17.9 from 17.1 in February.
In March, consumers turned negative about the stock market for the first time since the end of 2023. More consumers anticipated higher interest rates over the next 12 months, the highest level in two years, as consumers remained concerned about the impact of tariffs and high prices for key household staples like eggs. Assessments of their family’s future financial situation weakened to the lowest level since July 2022.
Plans for purchasing homes and cars were down. Surprisingly, plans for big-ticket purchases including appliances and electronics increased slightly, likely reflecting a desire to get ahead of tariffs. Consumers also expressed intentions to purchase additional services, especially movies and live entertainment.
PCE Price Index & Personal Income and Outlays: The Bureau of Economic Analysis (BEA) reported the latest statistics on the PCE price index, personal income, and personal spending:
PCE Price Index: The headline PCE price index for February increased by 0.3%, matching expectations and maintaining the same rate as the previous two months. Annually, headline PCE inflation rose by 2.5%, consistent with January’s rate and market expectations. The monthly increase was driven by a 0.2% rise in goods and a 0.4% rise in services. Food prices remained unchanged, while energy prices saw a slight 0.1% increase month-over-month in February.
Personal Income: Personal income increased by 0.8% in February, exceeding the market expectation of 0.4% and the previous month’s revised figure of 0.7% (down from 0.9%). This robust income growth was primarily driven by wages and salaries, rental income, receipts on assets, and transfer receipts. A significant portion of the month-over-month growth includes $49 billion in settlements from a domestic medical device manufacturer and a social media company. Excluding these one-time settlements, the February growth would have been 0.6%, slightly lower than the prior month but still higher than market expectations.
Disposable income, a crucial factor in consumer spending, also rose by 0.9% following a 0.7% in-crease in January. Real disposable income grew by 0.5% in February, up from 0.3% in the prior month. Personal savings reached $1,020 billion in February, with the personal saving rate (savings as a percentage of disposable income) rising to 4.6% from 4.3% in January, marking the highest rate since June 2024.
Personal Spending:, Personal spending (or consumer spending) rose by 0.4% in February, following a revised decline of 0.3% (up from -0.2%) in January. The February figure was slightly below the market expectation of 0.5% and was primarily driven by increased spending on both goods (0.9%) and services (0.2%). Within goods, the largest contributors were motor vehicles and parts, recreational goods and vehicles, and food and beverages. In the services category, the main contributors were transportation services and financial services and insurance.
Spending at nonprofit institutions declined by $15.8 billion (2.52%) in February, after declines of $8.6 billion (1.35%) in January, $14.7 billion (2.26%) in December, and $3.1 billion (0.47%) in November. The February decline is the largest drop since November 2020. Real personal spending increased by 0.1% in February, after a revised decline of 0.6% (up from -0.5%). Goods posted a 0.7% increase, while services posted a -0.1% decrease for the first time since January 2022.
On a concluding note,the U.S. stock markets saw declines this week, with all major indexes posting losses. These drops were primarily driven by persistent inflation, weakening consumer sentiment, and uncertainties surrounding trade policy. Treasury yields were relatively stable this week. The two, five, and ten-year Treasury yields ended at 3.89%, 3.98%, and 4.27%, respectively, with the two-year and five-year yields declining by 5 and 2 basis points, and the ten-year yield rising by 2 basis points com-pared to their levels a week ago.
The market now forecasts a 100% probability of three 0.25% rate cuts in 2025, totaling 0.75%. The first cut is expected in June, followed by September and December. The BEA’s final estimate for fourth-quarter GDP showed the economy grew at 2.4%, up from the second estimate of 2.3%, but down from the third quarter’s 3.1%. The Atlanta Fed’s GDPNow model estimates first-quarter GDP growth (adjusted for imports of gold) at -0.5%, and many economists expect minimal GDP growth for the first quarter.
Looking ahead, reciprocal tariffs matching the import duties imposed by various trading partners on U.S. products will be announced on Wednesday. The March employment report, expected to show a gain of 135,000 jobs and an unemployment rate of 4.1%, will be released on Friday. These key events will likely create market volatility next week.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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