Do Consumers Feel Constrained — Or Liberated?

Originally posted on MediaPost

Though not as dramatic a plummet as the DOW, consumer sentiment fell for the fourth straight month in March. People’s expectations of their income prospects, business conditions, and the labor market in half a year fell to the lowest point in 12 years.

But like good market researchers, spend watchers should parse out how consumers feel versus what they do.

Bad vibes didn’t lead to bad numbers last time

In the past few years, when inflation was very high, confidence was low.  I covered these vibe-cession behaviors in 2023 and 2024, when people traded down, switched brands and looked for deals but kept spending.  The economy stayed very strong. After all, consumer spending accounts for 70% of US GDP.

2025 is different because serious purse-string holders are more uncertain

This year, we have more uncertainty and a slowing economy. The Fed lowered the GDP growth forecast to 1.7%. Uncertainty trickles down from companies to consumers. For business decision-makers, like marketers, uncertainty tends to pause investment.  Then people start to fear losing their jobs.  If people get too nervous, they cut back, starting with the big-ticket items (as some travel, appliance, auto, and home improvement marketers may remember from the 2008 recession.)

We are not currently in a recession. The hard data points (unemployment levels, bond yield curves) all point to a strong economy. Yet “recession” searches are peaking on Google Trends. The job market is stable, with neither a notable number of job losses nor openings. Yet 28% of Conference Board respondents expect there to be fewer jobs in six months.

To see how spending will shake out, we need to watch the top 10%

Whenever consumer confidence dropped in the past few years, one cohort stood out as the Atlas holding up spending.  The top 10% of consumers spent through any broader bad feelings about inflation or the economy. Moody’s analysis showed that the top 10%, those making $250K or more, account for more than half of U.S. consumer spending. Zooming in on these affluent consumers who kept spending afloat in the last crisis, we have to consider that they are more likely to be in the stock market.

Are high-income consumers closing up their wallets?

In the first two months of 2025, affluent consumers were still spending money. Both Morning Consult and Bank of America reported that spending among affluent consumers rebounded in February.  Bank of America reports this cohort’s after-tax wage and salary growth was up 3.5% YoY, but spending on airlines fell by 7.1%, and home improvement expenditures were down 2.7%.

There is some evidence of trading down as well.  Costco, the retailer with surprisingly affluent customers, said its shoppers are choosing lower-cost proteins, like ground beef. Dollar General also reported consumers in higher-income households shopped more in the past few weeks.

And how are those high-income consumers feeling about the future?

If you slice the broad March confidence measures by income, the number of consumers making more than $125K a year didn’t drop. The price of the homes they bought remains high, but it’s not the same story for their 401(k)s.

The key issue in April will be how people react to shrinking portfolios. The stock market is not a recession indicator, but it is real money. It’s not great news if consumers’ previous spending was driven in part by their growing stock portfolios.  Consumers — and disproportionately, higher-income consumers — believe that tariffs will be inflationary, per Morning Consult.

How wealthy and optimistic affluent consumers feel will have a huge impact on consumer spending this year. We’ll keep asking them to understand how to refine our forecasts.