Shifting consumer behavior: From spending power to spending priorities

December retail sales showed clear signs of cooling after months of resilience amid a turbulent economic backdrop. The latest report showed sales were flat month over month, falling short of expectations for 0.4% growth and marking a sharp deceleration from November’s robust 0.6% increase. Weakness was concentrated in discretionary categories such as furniture, apparel, and electronics, while spending proved more resilient in necessities and home related materials. Soft auto spending was also a key contributor to December’s flat reading. Together, these trends suggest that the effects of tariffs and a softening labor market are beginning to filter through to consumer behavior, raising concerns that households may be approaching the limits of their spending capacity. 

The soft December retail sales print is closely aligned with a sharp deterioration in consumer sentiment. The Consumer Confidence Index fell meaningfully in January, declining 9.7 points to its lowest level since 2014. Perceptions of labor market conditions have weakened further, while concerns around inflation and tariffs remain elevated. As confidence erodes, shifts in consumer behavior are becoming increasingly evident in the retail sales data: Households are prioritizing essential spending while pulling back on discretionary purchases, a pattern that typically precedes slowing broader consumption. 

The bottom line: For investors, the combination of slowing retail momentum and deteriorating consumer confidence reinforces the view that the U.S. consumer is moving into a more constrained, late cycle phase. While this does not yet signal an abrupt pullback in growth, it does argue for greater selectivity. 

Source: Bloomberg. 

Julia Rozenfeld contributed to this article.