US shoppers give retailers an early holiday present

U.S. holiday spending projections for 2025 indicate an average of $1,007 per consumer, similar to last year, yet reveal a significant divergence where higher-income households plan to increase spending while lower and middle-income groups anticipate reductions. This mixed outlook is set against persistent inflation, partly driven by tariffs expected to continue impacting prices, and a deteriorating labor market, with 2025 recording the highest job cuts since 2020, signaling broader economic uncertainty and pressure on consumer purchasing power, particularly for lower-income segments.

Analysis

U.S. holiday spending projections for 2025 indicate an average of $1,007 per consumer, largely consistent with last year's $1,014, yet this masks significant underlying divergence. High-income households (earning $100,000+) anticipate increasing their spending to $1,479 from $1,403, while lower-income households (under $50,000) expect a notable decline to $651 from $776. Middle-income earners also project reduced spending at $847, down from $902 in 2023, highlighting a bifurcated consumer landscape.

Persistent inflation continues to erode consumer purchasing power, with the September CPI rising 3% year-over-year. Bank of America analysts attribute a significant portion of this inflation to tariffs, noting a 1.3% increase in core goods PCE over the past year and 2.2% annualized since March. BofA anticipates tariff-related inflation will persist as companies pass costs to consumers and effective tariff rates rise further.

The labor market shows significant deterioration, with 1.1 million job cuts announced through October 2025, a 65% year-over-year increase and the highest level since 2020. This trend, including substantial cuts in warehousing (47,878) and technology (33,281) in October, signals softening consumer and corporate spending. The unusual volume of Q4 layoffs, historically avoided, underscores rising economic uncertainty.

Key Decisions for Investors

• Investors should closely monitor consumer spending patterns, particularly the widening divergence between high-income and lower/middle-income segments, as this indicates uneven economic resilience and potential shifts in retail sector performance.
• Evaluate companies' exposure to persistent inflation, especially tariff-driven cost increases, and their ability to pass these costs to consumers without impacting demand, which could affect margins and profitability.
• Pay close attention to ongoing job cut announcements and broader labor market data, as increasing unemployment, particularly in key sectors like warehousing and technology, signals weakening economic activity and potential downward pressure on consumer demand.
• Consider re-evaluating exposure to retail companies, favoring those catering to higher-income demographics or possessing strong pricing power, while exercising caution with those heavily reliant on lower and middle-income consumer spending.