By Sabrina Escobar

It isn't a secret that Americans are feeling gloomy about the economy. The big worry on Wall Street is whether that anxiety will translate to a year of sales declines.

There's a chance it could. Consumers typically pull back when they're uncertain about the economy, and recent data point to a slower start to the year. But there are some indications that March is looking a little sunnier.

Consumer sentiment has fallen for three straight months, while consumer confidence, a competing metric, has declined for four to its lowest level in four years. Many Americans are concerned about how the Trump administration's whipsawing economic policies will affect them, particularly tariffs, federal government layoffs and cuts, and other trade policies.

In the past five years, sentiment hasn't correlated to spending. But weaker January and February spending data have prompted fears that economic worries are finally taking a toll on spending and economic growth. Consumer spending accounts for roughly 70% of gross domestic product.

February's retail sales recovered slightly from January's precipitous drop but still came in short of expectations. Personal consumption expenditures for the month rose by 0.4% from January, slightly higher than the 0.3% gain economists projected, and ticked up by just 0.1% when adjusted for inflation. On top of that, the savings rate rose to 4.6% last month, the highest level recorded since last summer. Consumers tend to save more when they feel uneasy about the economy. If they're saving, they're typically not spending.

"The February spending data confirm a slowdown in consumer activity in the first quarter of 2025," said Bill Adams, chief economist for Comerica Bank. "Weak spending in January could be attributed to one-off drags from the LA wildfires and bad weather, but February's anemic rebound points to a more persistent drag."

The subdued rise in real spending suggests first-quarter gross domestic product growth will be significantly weaker than the fourth quarter's 2.4% increase. The question is whether the slowdown in the first two months of the year is a fluke or a longer-term trend that will define spending the rest of the year.

Andrew Hollenhorst, an economist at Citi, believes consumer pessimism about the future and rising unemployment concerns means that "at least some of the spending slowdown is likely to persist."

But as David Alcaly, lead macroeconomic strategist at Lazard Asset Management, notes: "Much remains uncertain and it's premature to be drawing judgments about impacts." If the hard data such as consumer spending keep softening, that could certainly fuel apprehension about a recession.

Aditya Bhave, U.S. economist at BofA Securities, however, doesn't think a protracted consumer slowdown is a foregone conclusion. Bhave analyzed five forward-looking data measures for clues as to what the economy is looking like in real-time: jobless claims, Bank of America card spending growth, tax refunds, households balance sheets, and airport traffic.

"All tell the same story: there are no clear signs of cracks yet," Bhave wrote.

Initial jobless claims, which are released weekly, have returned to very low levels in March, pointing to a still-solid labor market, Bhave wrote. Meanwhile, BofA card data suggests spending picked up in March from February; Citi's credit-card data also suggest that outlays improved through March, with month-to-date total spending down by 1.6% compared with a 2.5% decline in February as of March 26.

And while February's PCE data saw the biggest decline in restaurant and hotel spending in over two years, March was looking better. Sales at fast-casual restaurants ticked up by 0.9% year over year on average in the first three weeks of the month, according to credit- and debit- card data tracked by Bloomberg. February's sales were decidedly in the red, down about 1.3% year over year on average, per Bloomberg.

Tax refunds could provide an extra boost to spending. Through March 14, the average refund amount was up 5.2% year over year, according to data from the Internal Revenue Service.

Airport traffic improved as well, with the seven-day moving average of passengers overtaking 2024 levels in mid-March after several months of flat annual growth, according to data from the Transportation Security Administration. That could keep rising as the weather warms, according to The Conference Board's consumer confidence survey. More consumers were planning on spending on outdoor activities, travel, and vacations in March.

Importantly, balance sheets remain in "robust health" overall, Bhave wrote. BofA estimates that by the end of 2024, people's liquid assets -- including money in checking or savings accounts -- were almost equal to their total liabilities. Having that cash on hand will help consumers absorb the higher costs of inflation and new tariffs in the months ahead.

All in all, consumer sentiment will likely continue to get roiled by the new administration's changes. But with resilient balance sheets and warmer weather, the economy may still have some surprises in store.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 31, 2025 03:00 ET (07:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.