Consumer Spending Surged Ahead of Tariffs

U.S. retail sales posted their strongest gain in over two years during March as consumers rushed to make purchases before tariffs took effect, according to Commerce Department data released last month. The 1.4% increase—the largest since January 2023—likely pulled forward future demand rather than signaling sustainable economic strength, raising concerns about spending patterns in the months ahead.

“Net, net, these are simply blow out numbers on March retail sales where the rush is on like this is one gigantic clearance sale,” said Chris Rupkey, chief economist at Fwdbonds. “Consumers are expecting sharply higher prices the next year and are clearing the store shelves and picking up bargains while they can,” according to CNBC.

Auto Sales Drove Exceptional Growth

The retail sales surge was particularly pronounced in the automotive sector, where receipts at dealerships accelerated 5.3%—also the largest advance since January 2023. Industry analysts attributed this spike to consumers attempting to avoid the impact of President Trump’s 25% global car and truck tariffs, which took effect in early April.

Auto manufacturers reported significantly higher sales volumes in March as buyers rushed to complete purchases before prices increased. “Motor vehicle manufacturers reported a big jump in auto sales in March, attributed by some to a rush by buyers to try and beat the tariffs,” noted Reuters in its analysis of the retail data.

Economic Outlook Darkens Despite Spending

Despite the strong March retail figures, economists’ growth estimates for the first quarter remained below 0.5% annualized, with subsequent data confirming the economy actually contracted 0.3% in Q1. This combination of slowing growth and high inflation has intensified concerns about potential stagflation—a scenario where the economy experiences both stagnant growth and elevated inflation.

Consumer sentiment has plummeted to its second-lowest level on record, according to the University of Michigan survey. “This decline was, like the last month’s, pervasive and unanimous across age, income, education, geographic region and political affiliation,” said Joanne Hsu, the survey’s director, as reported by CNN.

Inflation Expectations Rising

Particularly troubling for economic policymakers is the sharp increase in consumers’ inflation expectations. The University of Michigan survey showed consumers now expect inflation to run at 5.0% over the next year—the highest reading since November 2022—and 4.1% over the next five years, the highest since February 1993.

These elevated inflation expectations could become self-fulfilling as consumers adjust their spending patterns, potentially making the Federal Reserve’s job more difficult. “Inflation expectations are the transmission mechanism in which a one-time hit to the price level from tariffs turn into a general increase across the price level or inflation,” explained Joseph Brusuelas, chief economist at RSM US, according to Reuters.

Retailers Brace for Spending Pullback

Major retailers are already adjusting their expectations for the remainder of 2025, anticipating a slowdown in consumer spending after the March surge. The National Retail Federation recently forecast that retail sales will grow between 2.7% and 3.7% in 2025, reaching between $5.42 trillion and $5.48 trillion—a more modest pace than last year’s 3.6% growth.

“While we do expect slower growth, consumer fundamentals remain intact, supported by low unemployment, slower but steady income growth, and solid household finances. Consumer spending is not unraveling,” said NRF Chief Economist Jack Kleinhenz. However, he added, “It’s the hard data on employment, income and tariff-induced inflation—not consumer sentiment—that supports our view of a slower trajectory for consumer spending,” according to NRF.

Wealth Gap in Spending Patterns

Analysis of consumer spending data reveals growing divergence between income groups. Lower-income consumers, already strained by high prices for essentials, have limited ability to absorb additional price increases from tariffs. Many have already traded down to cheaper options and discount retailers.

“Wealthy consumers’ stock market gains kept the economy growing in 2024 despite high prices, but the wealthy won’t feel confident enough to keep spending if this keeps up,” warned Bill Adams, chief economist at Comerica Bank, as cited by CNN. This sentiment was echoed by prominent financial leaders, with BlackRock CEO Larry Fink comparing today’s uncertainty to the 2008 financial crisis.

Policy Implications Growing

The spending surge-and-potential-slowdown pattern presents challenges for economic policymakers. The Federal Reserve is closely monitoring how consumer sentiment translates into actual spending behavior, particularly as it weighs future interest rate decisions.

Treasury Secretary Scott Bessent has acknowledged the economic headwinds, stating in early April that the economy might experience a “detox period” as it transitions from public to private spending. On May 1, he acknowledged there were “no guarantees” against a recession, highlighting the precarious balance facing both consumers and policymakers in the months ahead.