Personal income and spending March 2025

A pre-tariff spending spree

Consumers ended the first quarter on a strong note as they pulled forward some purchases of big-ticket items in anticipation of tariff price hikes and showed some appetite for services such as dining out and hotel stays. Inflation-adjusted personal outlays increased 0.7% in April, driven by a jump in durable goods outlays, which saw their largest increase since January 2023. While the data points to a robust carry-over into Q2, it’s a partial mirage stemming from a pull-forward of demand. We expect consumer spending growth will downshift in coming quarters as tariffs weigh on households’ purchasing power and lead to weaker labor market dynamics. 

• Personal income increased 0.5% month over month (m/m) in March on moderate wage gains and a strong increase in farm proprietors’ income, primarily reflecting payments from the Emergency Commodity Assistance Program as part of the American Relief Act. With inflation unchanged over the month, real disposable income also rose 0.5% m/m and was up a decent 1.7% year over year (y/y) in April.

• With the increase in personal outlays outpacing the gain in income, consumers had to dip into their savings to finance their spending as the personal savings rate fell 0.2 percentage points (ppt) to 3.9% in April after rising in the prior two months by a cumulative 0.8ppt. 

• On the inflation front, the headline personal consumption expenditures (PCE) deflator was unchanged in April — in line with expectations — while the core PCE index surprised to the downside with a flat print compared to consensus expectations for a 0.1% gain. As a result, headline PCE inflation cooled from an upwardly revised 2.7% y/y to 2.3% while core inflation fell to 2.6% y/y from an upwardly revised 3% y/y pace in February. Looking ahead, though, higher tariffs will lead to a renewed inflation impulse in coming quarters, with core PCE inflation likely to end 2025 in the 3.5% to 4.0% range.

• Looking into the spending details, there were signs that households made major purchases ahead of tariff increases. Inflation-adjusted spending on durable goods jumped 3.2%, driven by a surge in auto purchases (+8.1%), and moderate gains in recreational goods (+1.4%) and furniture and furnishing (+0.8%). Outlays on nondurable goods rose 0.4% for a second consecutive month as weaker spending on gasoline (-0.9%) and groceries (-0.2%) were offset by stronger spending on apparel (+0.3%) and other items (+1.2%). Meanwhile, services outlays grew by the most in over a year, up 0.4%, with the gain driven by a strong rebound in outlays at hotels and restaurants (+1.2%) and solid spending on transportation (+0.5%) and health care (+0.4%) services. 

• In the coming months, we expect price-sensitive consumers will become more judicious with their spending and reduce non-essential purchases. Pre-emptive inflation anxiety is already weighing on consumer morale, with sentiment gauges plunging and inflation expectations rising. As the negative impact from tariffs takes hold, the combination of higher inflation, weaker labor market trends and depressed consumer sentiment will likely translate into substantially slower consumption growth. We foresee real consumer spending growth of 1.8% in 2025, following a 2.8% advance in 2024.