American consumers are holding out

Key takeaways from the september 2nd , 2025 market update  insights from Sebastian Paris Horvitz

In-Depth insights

American consumers seem to be holding on

Consumption rebounds in July

American consumers remain the cornerstone of US economic growth. However, since the beginning of the year, consumer appetite has declined quite sharply, with the first quarter of this year seeing the weakest quarterly growth in nearly five years, at an annualized rate of 0.5%.  

The second quarter saw a rebound, driven in particular by consumption of goods. This rebound appears to be continuing in July, with a sharp rise in household spending, showing growth of 0.3% over the month in real terms. 

This rebound in consumption is partly due to a sharp rise in incomes in July, reflecting a labor market that remains relatively strong, despite the fairly sharp slowdown in job creation in recent months. In fact, the savings rate has stabilized at 4.4%, although it remains low. 

It should be noted, however, that the data remains heavily distorted by the administration's tariff measures. For example, car purchases rebounded sharply over the month, no doubt in anticipation of households' fears of sharp price rises in the coming months.   

We will probably have to wait a few more months to see the pricing situation normalize and to see the real impact of cost increases on household behavior.

Consumer confidence remains low

What is certain, and this may seem paradoxical, is that consumer confidence remains low, as revealed by the University of Michigan's final survey for August.

Inflation expectations have fallen but remain very high

In part, weak confidence is affected by persistent fears of a new surge in inflation. Indeed, short- and long-term inflation expectations, although down from their highs, remain at extremely high levels. 
It should be noted that the University of Michigan survey breaks down expectations according to the political leanings of respondents. The results consistently show that those who identify as Democrats expect inflation to accelerate sharply, while those with Republican leanings expect it to remain very moderate. This divide is historically high. Overall, however, fears about inflation remain high.

Inflation resumes upward trend

As we have seen since the announcement of historic tariff increases, their impact on inflation has been relatively limited. Nevertheless, in certain product segments, they are beginning to be felt. 
However, these effects were still generally weak in July's figures, with the consumer price deflator (CPD), the Fed's preferred measure of inflation, remaining stable year-on-year at 2.6%, as expected. Core inflation, meanwhile, accelerated to 2.9%. 
As we have repeatedly pointed out, it is very likely that the pass-through of tariffs to consumer prices will be slow. This is particularly due to the chaotic negotiations of recent months. 
However, we have no doubt that these tariff increases will be reflected in prices in the coming months and, in certain sectors, in corporate margins.

Inflation is no longer slowing down and is trending upward

Even though inflation figures have not reacted quickly so far, the trend toward disinflation has clearly come to a halt and the trend is now upward. 
In fact, trend indicators, whether the PCE index adjusted for extreme variations (upward or downward) or the breakdown of the index between prices sensitive to the economic cycle and those sensitive to specific sectoral movements, show that the trend appears to be well distributed upward.  
This increase should primarily affect the prices of goods affected by tariff increases. However, one of the troubling lessons from the July PCE data is that service prices are also trending upward. This should be a cause for concern for the Fed. 
We will see what lessons next week's CPI release brings. 
For now, the Fed seems to be moving towards a rate cut in September, emphasizing the risk to employment rather than inflation in order to ease its policy. Nevertheless, in the coming months, we continue to believe that the Fed will face a stagflationary environment that will complicate monetary policy decisions.

Eurozone: Industry recovers and employment remains stable

Industrial activity continues to recover in August

The final S&P PMI survey for industry in the eurozone brought rather good news. The overall index was revised slightly upward, remaining in expansionary territory at 50.7. 

The final indicator also provides details by country and shows that southern countries remain generally more dynamic. In particular, among the major countries in the zone, Spain continues to enjoy a relatively favorable economic situation. 

We believe that this industrial recovery should continue, albeit at a slow pace, before accelerating more significantly towards the end of the year. This will be driven by the initial effects of stimulus policies, particularly in Germany, against a backdrop of more accommodative monetary policy.

Eurozone: a strong job market but sluggish confidence 

At the same time, with a resilient job market, we can expect consumption to pick up. 
For now, it is true that despite favorable conditions in the job market and slowing inflation, consumption remains sluggish in the region's recovery. 
This weakness in consumption can be attributed in part to continued low confidence. Anxiety caused by the trade war, increases in defense spending and, above all, political instability in certain major countries are certainly factors that do not necessarily bode well. 
It will be important to see in the coming months whether these concerns dissipate in order to consolidate the European recovery with more dynamic consumption.

China: economic activity remains steady but moderate

U.S. equity valuations remain elevated

Official PMI surveys in China were slightly more favorable than expected, with a composite indicator (services and industry) slightly stronger than anticipated.  Nevertheless, hovering just above the line separating contraction from expansion, we can see that activity remains relatively weak in the country. 
However, the authorities may see these figures as reassuring news, with industry not collapsing despite the huge tariff shock imposed by the United States. In fact, S&P's PMI survey for August is back in expansionary territory. 
Nevertheless, it is likely that tariffs will weaken China's export machine in the coming months, which has been one of the main drivers of recent expansion, with private domestic demand still weakened by ongoing adjustments, particularly in the real estate sector. 
In this regard, we expect more stimulus efforts to support the domestic economy in order to preserve growth and better absorb the US shock. 

Sebastian PARIS HORVITZ

Directeur de la recherche