After starting 2025 on solid footing, U.S. consumer spending is likely to weaken through the rest of the year and into 2026 as households feel the effects of tariffs and economic uncertainty.
Morgan Stanley Research forecasts year-over-year growth of 3.7% for nominal spending in 2025 and 2.9% in 2026, compared with an expansion of 5.7% in 2024. The cooldown is likely to be more pronounced in the last quarter of 2025 and the first three months of 2026.
“There are three main reasons behind the slowdown: the cooling labor market, tariff-induced inflation, and policy uncertainty weighing on consumers and businesses,” says Morgan Stanley Global Economist Arunima Sinha. “Additionally, the housing market remains largely stuck and consumer credit shows a mixed picture: delinquencies have been rising, while default rates are still contained.”
Affluent Will Carry Consumer Spending
Despite the forecast of more caution ahead, recent data still show a resilient consumer. Spending increased 5.5% in the first quarter from the same period of 2024.
“Although some of that growth likely reflected some hasty purchases in anticipation of higher tariffs, the pace of expansion suggests that consumers still have a healthy balance sheet and are willing to spend,” Sinha says.
Steady increases in labor market income are one of the reasons behind the strength in consumption. And the recent volatility in equity markets doesn’t appear to have an impact on higher-income consumers.
While upper-income groups can weather the impacts of economic and market uncertainty more easily, lower- and middle-income consumers tend to be more vulnerable for a few reasons.
First, these cohorts will be the first to feel the impact as the labor market cools. Second, proposed tax reductions may be a net negative for consumers who rely on such programs as SNAP (Supplemental Nutrition Assistance Program) and Medicaid. Finally, lower- and middle-income consumers are more exposed to tariff-induced price increases.
Limited Housing Recovery in 2025
Activity in the U.S. housing market remains weak, with affordability at the lowest levels in decades. In the first four months of 2025, existing home sales were 2.4% lower than in the same period of 2024.
Mortgage rates are currently a major obstacle for home buyers. Rates have been fluctuating between 6.6% and 7% for the last seven months, down from record highs of the second half of 2023, but still much higher than in 2020 and 2021, when they fell below 4%, allowing millions of Americans to buy or refinance homes.
“Affordability is not set for any meaningful improvement until 2026 as interest rates remain unchanged,” says James Egan, Morgan Stanley’s U.S. Housing Strategist and Co-Head of Securitized Products Research. “However, the inventory of homes for sale has been climbing, which could allow for marginal growth in sales volume throughout the second half of 2025.”
Morgan Stanley Research expects existing home sales to end this year with a 2% gain compared with 2024, growing to a 5% increase for 2026 as there could be a significant improvement in affordability.
“As interest rates are likely to fall starting in March 2026, and assuming deregulation for the U.S. banking sector boosts demand for mortgage-backed securities, we could see mortgage rates down to 5.50% to 5.75% for the first time since 2022,” Egan says. “Lower rates would bring back both demand for housing, and supply of for-sale inventory.”
Consumer Credit Still Healthy
Recent consumer data show that delinquencies, or lateness to meet payments, are on the rise. However, defaults, which occur when a borrower repeatedly fails to meet a payment obligation, are below predictions, based on 15 years of historical data.
“Consumers are not deteriorating at the same rate they have historically, but rather, they are missing a few months and then resuming payments,” says Carolyn Campbell, Morgan Stanley’s Asset-Backed Securities Strategist, noting that low unemployment rates have been supportive of healthy consumer credit over the past three years.
“Even if stretched, consumers still have income to resume payments before rolling into default,” Campbell says. “Additionally, lenders are making more efforts to work with individuals who are behind their payments, preventing a further deterioration.”
