Amid a weaker economic outlook, and a softening labour market, U.S. consumer spending growth is starting to slow — a trend that’s expected to continue this year, leading to higher corporate defaults, Moody’s Ratings says.
In a new report, the rating agency said that, while consumer spending held up in the early part of 2025, it is forecasting a slowdown in consumption growth throughout the rest of the year — as household income comes under growing pressure, and inflationary pressures persist due to U.S. trade policy.
“Wage growth across all income brackets will continue to moderate over the coming year, keeping consumers cautious about spending,” it said. “Also, tariffs will erode consumers’ purchasing power and dampen their willingness to spend.”
Indeed, household consumption growth has already slowed from its pace in late 2024, it noted.
“There has been some front-loading of consumer demand, particularly for durable goods, with households making purchases before anticipated tariff-driven price increases,” it said.
Additionally, shifts in U.S. fiscal policy are also poised to pressure household finances, “particularly for low-income households,” it said — as the U.S. tax bill promises to cut federal safety net programs, such as Medicaid and food stamps.
While higher income households would benefit from the bill’s extension of existing tax cuts, that’s unlikely to drive new spending as it primarily preserves the status quo, Moody’s noted.
Against that backdrop, spending growth is seen slowing, but Moody’s said that it’s not expected to contract, thanks to still-solid household balance sheets. That will continue to underpin consumer spending, “even amid financial volatility and uncertainty,” according to the rating agency.
That said, spending may be increasingly tied to the health of financial markets, it noted — given that equities have recently overtaken real estate as the largest asset category for households.
“With households’ asset mix shifting toward more volatile components, equity market swings can have an outsized influence on household balance sheets,” it said. A rising perception of risk can dampen discretionary spending, “particularly for categories tied to confidence, such as travel, leisure, and durable goods,” it noted.
Looking further out, Moody’s said that the slowdown in household consumption “may begin to ease toward the end of 2025, with a shallow and uneven recovery likely to take hold in 2026 … as the labour market begins to stabilize and consumer confidence begins to recover.”
In the meantime though, default risk has increased in certain consumer sectors, Moody’s said —due to weaker consumption, higher tariff-related costs, and increased uncertainty.
“As the broader economy cools and household spending softens, financial challenges will rise for consumer-reliant businesses,” it said. The durable goods and consumer services sectors are expected to see the highest default rates.
Indeed, discretionary spending on services is already cooling, particularly for high-ticket items such as travel, Moody’s said.
“By contrast, food services spending recently stabilized, suggesting that consumers may be opting for smaller indulgences over larger discretionary purchases,” it said.
Moody’s also noted that it expects higher prices and geopolitical uncertainty to weigh on consumer confidence in Europe in the second half.