Consumer spending is collapsing this quarter primarily due to a sharp decline in consumer confidence, especially among lower and middle-income households, despite recent months showing some resilience in retail sales. This collapse in spending is driven by several interconnected factors including rising inflation, labor market uncertainties, demographic shifts, and changing economic policies.
One of the key reasons for the collapse is the significant drop in consumer sentiment. The University of Michigan’s Consumer Sentiment Index fell to a four-month low of 55.4 in September 2025, representing a 21% decline year-over-year. This decline is most pronounced among lower and middle-income groups who are increasingly worried about business conditions, job security, and persistent inflation. These concerns are causing consumers to become more cautious about their spending, even though recent retail sales data still show some strength due to momentum from past wage gains and savings[1][4].
Inflation remains a persistent pressure on consumers. Although consumer spending rose modestly in August 2025 by 0.4%, inflation-adjusted measures show that price increases continue to erode purchasing power. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures price index excluding food and energy, stayed at a 2.9% annual rate, well above the Fed’s 2% target. This ongoing inflation means that consumers face higher costs for everyday goods and services, which squeezes disposable income and forces many to cut back on discretionary spending such as dining out, clothing, and big-ticket items[4][3].
The labor market is also showing signs of cooling, which adds to consumer anxiety. While the unemployment rate remains relatively low at 4.3%, there are emerging cracks such as slower job creation and a flattening workforce. This is partly due to demographic trends: the retirement of the baby boom generation combined with declining fertility rates is shrinking the working-age population. Additionally, more restrictive immigration policies have reduced the influx of new workers, limiting labor force growth. This means fewer new jobs are created without a corresponding rise in unemployment, creating uncertainty about future income stability for many households[5].
Another important factor is the uneven distribution of spending power across income groups. Higher-income households continue to drive most of the consumption growth, while the bottom 80% of earners have only managed to keep pace with inflation since the pandemic. This growing divide means that while aggregate retail sales may appear strong, the majority of consumers are not experiencing real income growth, leading to a fragile spending base that could quickly contract if economic conditions worsen[2][6].
Economic policies and external factors also contribute to the spending collapse. Tariffs and trade tensions, along with geopolitical uncertainties, have created headwinds for businesses and consumers alike. Although some legislative measures like the One Big Beautiful Bill (OBBB) have provided temporary relief, the overall environment remains challenging. The Federal Reserve’s cautious approach to interest rate cuts, influenced by strong GDP growth forecasts, means borrowing costs remain relatively high, which can dampen consumer credit and spending[5][2].
Seasonal spending patterns also reflect this cautious mood. Surveys indicate that consumers expect to reduce their holiday spending by about 5% compared to last year, the first notable decline since 2020. Many plan to cut back on dining out, apparel, and major purchases due to concerns about price increases and economic uncertainty. While e-commerce sales are expected to grow moderately, in-store purchases are projected to slow down significantly, signaling a broader pullback in consumer activity[3].
In summary, the collapse in consumer spending this quarter is not due to a single cause but rather a combination of declining consumer confidence, persistent inflation, labor market challenges, demographic shifts, income inequality, and cautious economic policies. These factors together create a fragile economic environment where consumers, especially those in the lower and middle-income brackets, are tightening their belts in anticipation of tougher times ahead.