Consumer Spending Fuels U.S. Growth – With Constraints

Perc Pineda, PhD
Chief Economist, PLASTICS

The U.S. economy expanded at an annualized rate of 2.3% in the fourth quarter, with full-year growth reaching 2.8%. While sectoral imbalances persisted in 2024—particularly in the sluggish manufacturing and housing sectors—the household sector remained a key driver of economic growth. 

Personal Consumption Expenditures (PCE), which measures household spending, rose at an annualized rate of 4.2% in the fourth quarter. Durable goods consumption increased by 12.1%, while nondurable goods consumption rose by 3.0%. For the full year, PCE grew by 2.8%, with durable and nondurable goods consumption up 3.3% and 1.9%, respectively. Services consumption increased by 3.0%. 

Consumer engagement in 2025 will be a critical factor in determining economic growth. 

Consumer Sentiment and Debt 

Based on the University of Michigan’s monthly consumer sentiment survey, consumer sentiment declined to 64.7 in February 2025, down from 71.1 in January. Despite stronger sentiment in January, retail and food services sales fell by 0.9% that month, contradicting the survey’s indication of consumer confidence. It will be interesting to see February retail sales—particularly for discretionary items—to determine whether they contradict the downward shift in consumer confidence from January to February. 

With employment as the primary source of income for most consumers, signs of a cooling labor market could influence expectations and, in turn, spending. Since March 2022, total nonfarm job openings have been on a downward trajectory. Given modest real disposable personal income growth—averaging just 0.2% per month in 2024—consumer spending will likely rely more on credit. The latest Federal Reserve data show that credit card debt and other revolving consumer loans at all commercial banks have reached $1.1 trillion.  

Inflation and interest rates 

The year began with headline inflation, as measured by the Consumer Price Index (CPI), rising to 3.0% in January from 2.9% in December, raising concerns that price pressures are not easing as expected. Core CPI also inched up from 3.2% to 3.3% over the same period. Higher-than-expected inflation was driven by rising food and energy costs—exacerbated by colder winter conditions—along with increased shelter and transportation service prices. 

Based on the Federal Reserve’s preferred inflation measure, the PCE price index, headline PCE inflation rose 2.5% year over year in January, while core PCE increased 2.6%, down from 2.6% and 2.9%, respectively, in December. Although this may suggest a slowing pace of price increases, the Federal Reserve is still expected to cut interest rates later rather than sooner—absent a clear downward inflation trend. As a result, household spending will persist despite elevated prices and higher borrowing costs, with discretionary spending likely to moderate while nondiscretionary spending remains stable. 

Sectoral Imbalances  

Although the U.S. economy performed well in 2024, some sectors experienced negative growth. Expansion in finance, technology, healthcare, and services offset declines in manufacturing, homebuilding, and home sales. Manufacturing remains the primary market for the plastics industry, while building and construction is one of its key end markets.  

Residential investment spending rose 5.4% in the fourth quarter, reversing two consecutive quarters of decline. However, whether this signals renewed consumer engagement in housing remains uncertain. A 9.8% drop in housing starts in January from December suggests it may be premature to conclude that homebuilding is on a solid recovery path. 

While household balance sheets remain healthy, based on third-quarter 2024 data from the Federal Reserve—showing household assets far exceeding liabilities—cautiously optimistic consumers could lead to moderate economic growth in the first quarter. While consumer spending may continue to support growth, its momentum is not unlimited.