Consumer Spending and Employment Trends: Strength Amid Uncertainty
In the current economic landscape marked by policy uncertainty and market volatility, consumer spending and employment trends provide crucial indicators of economic health. During a recent HBKS Wealth Advisors webinar, Chief Investment Officer Brian Sommers highlighted the resilience of these fundamental economic pillars despite growing concerns reflected in sentiment surveys.
The Sentiment Paradox
One of the most striking features of the current economy is what might be called the “sentiment paradox” — the significant gap between how consumers feel about the economy and how they’re actually behaving.
Consumer sentiment surveys show increasing pessimism about future economic conditions, driven largely by uncertainty surrounding government policies and concerns about potential inflation. Many closely watched indicators of consumer sentiment reflect growing anxiety about the economic outlook.
“Most closely watched indicators of consumer sentiment are showing that consumers are becoming worried about their future due to the continued back and forth of a lot of the policy discussions, both with the federal government and with the Federal Reserve,” Sommers explained.
This negative sentiment could theoretically lead to reduced spending as consumers become more cautious about their financial futures. “If this concern continues, a pullback by consumers is possible,” Sommers noted, adding that such a pullback “could slow the economy to the point where the Federal Reserve will need to cut rates in order to avoid a recession.”
Real Wages Power Consumer Spending
Despite these sentiment concerns, actual consumer behavior tells a much different story. Consumer spending, which accounts for approximately two-thirds of U.S. GDP, continues to trend upward.
“Although consumers are getting more pessimistic, if you look at how much people are actually earning, the figures are much more upbeat,” Sommers observed. “Thanks to the drop in inflation since 2022, average hourly wages are, in real terms, near their highest in five years, which is one of the main reasons why consumers continue to spend.”
This growth in real wages—nominal wage increases adjusted for inflation—provides consumers with genuine purchasing power increases. When consumers have more disposable income in real terms, they tend to spend it, regardless of their stated concerns about the future economy.
The strength in consumer spending provides critical support for continued economic growth. As Sommers emphasized, “As long as real wages remain healthy, there’s no reason to think that consumer spending shouldn’t continue, and as long as consumer spending continues, then the economy should continue to grow.”
Employment Remains Solid
Complementing the positive real wage trend is the continued strength in the labor market. Despite predictions of weakening employment figures in surveys (soft data), the actual employment reports (hard data) continue to exceed expectations.
Current employment indicators show:
- The unemployment rate at approximately 4.2%, historically low compared to long-term averages
- Continued job creation at a “healthy clip,” according to Sommers
- Job growth exceeding expectations in recent reports, contradicting survey-based projections of weakness
This employment strength creates a virtuous cycle for consumer spending. Strong employment maintains household income, which supports spending, which in turn supports business revenue and further employment.
“This is a really good example of the difference between the soft data and the hard data,” Sommers pointed out, “because jobs surveys leading up to this report indicated that this report would come in a lot weaker than it did, but the number of jobs created actually beat expectations.”
The Policy Uncertainty Factor
While consumer fundamentals remain strong, the elevated level of economic policy uncertainty creates a potential vulnerability. The Economic Policy Uncertainty Index has spiked to levels not seen since the height of the COVID-19 pandemic, reflecting concerns about tariff policies, potential Federal Reserve leadership changes, and government spending cuts.
This uncertainty can affect consumer and business behavior in several ways:
- Delayed major purchases: Consumers may postpone significant expenditures like homes, vehicles, or appliances until policy directions become clearer
- Precautionary saving: Households might increase saving rates as a buffer against perceived economic risks
- Business investment hesitation: Companies may delay capital investments and expansion plans, potentially affecting job creation
- Credit market impact: Uncertainty can lead to tighter lending standards and higher risk premiums, affecting access to credit
“Uncertainty can be a problem in and of itself,” Sommers warned, “because it can act as an impediment for both businesses and consumers who face tough decisions. It’s really hard to commit to a large purchase or an investment in the next few months.”
Housing Market Concerns
One area where uncertainty is already having a tangible impact is the housing market. Sommers noted that the housing market has “weakened a bit lately” due to several factors:
- Delayed purchases as buyers assess the policy landscape
- Price declines in certain regional markets
- Concerns that persistent inflation may keep mortgage rates elevated longer than previously expected
“If tariffs cause inflation expectations to remain elevated, then that’s likely to mean the Fed is going to keep interest rates higher than expected. So mortgage rates potentially could stay higher than expected,” Sommers explained. “All of that leads to the potential for lower prices in the housing market.”
As a result, Sommers says there could be “some weakness, at least in the near term” in residential real estate.
Manufacturing Expectations
When asked about the prospects for manufacturing returning to the U.S. because of tariff policies, Sommers expressed measured expectations. He pointed to two key factors limiting the potential job impact of any manufacturing reshoring:
- Automation and AI advancement: “There has been so much progress in automation and AI that a lot of those manufacturing jobs—the number of manufacturing jobs is much less than it used to be because of the implementation of artificial intelligence and automation.”
- Supply chain diversification: Rather than moving production back to the U.S., many companies are “moving away from China, but into other parts of the world in Southeast Asia.”
As a result, Sommers believes “the number of manufacturing jobs that are going to come back here are fairly small and are not going to have a really large impact on the employment picture in the U.S.”
Implications For Investors
The current economic picture presents a study in contrasts. On one hand, consumer fundamentals remain robust, with strong real wage growth supporting continued spending and a solid employment picture providing income stability. On the other hand, sentiment surveys show growing pessimism, and policy uncertainty creates headwinds for future growth.
The critical question for investors and economic forecasters is whether the negative sentiment will eventually translate into changed consumer behavior, or if the fundamental strength in wages and employment will prevail.
Sommers believes the economy has enough underlying strength to weather the current uncertainty, making a recession unlikely in the near term. However, he acknowledges that the risks have increased, particularly if policy uncertainty persists or intensifies.
For investors, this suggests maintaining a balanced approach that recognizes both the current economic strength and the potential risks from policy uncertainty. Diversification across asset classes and geographies remains crucial in navigating this complex environment.
This article is based on a May 2025 webinar presented by Brian Sommers, CIO of HBKS Wealth Advisors. While the information presented is believed to be accurate, individual financial circumstances vary, and readers are encouraged to consult with their financial advisor before making investment decisions.
