• Federal Reserve Chair Jerome Powell points to a marked deceleration in consumer spending, with growth slowing to 1.2% in Q1 from 4% in the prior quarter.
  • Businesses report a deteriorating outlook, citing economic policy uncertainty, tariffs, and inflation as primary headwinds.
  • The Fed's Beige Book details a shift in corporate strategy, with firms increasing promotions and adjusting operations to navigate the more cautious environment.

Federal Reserve Chair Jerome Powell confirmed a significant shift in the U.S. economic landscape Wednesday, highlighting that consumer spending has slowed "markedly" and that businesses are growing increasingly cautious due to persistent uncertainty.

The comments, made during a moderated discussion, reflect data showing real consumer spending growth decelerated to just 1.2% in the first quarter of 2025, a sharp pullback from the 4% pace seen in the final quarter of 2024. Purchases of durable goods have declined substantially, a trend exacerbated by elevated financing costs and the impact of higher tariffs. Powell noted that aggregate wage growth has lagged behind spending increases since mid-2024, a dynamic that is pressuring household budgets.

This consumer retrenchment is occurring alongside a souring business sentiment. According to the Fed’s most recent Beige Book, compiled from anecdotal reports across its 12 districts, businesses are seeing "flat or declining consumer spending" and point to ongoing economic policy uncertainty as a key headwind. "Firms are telling us that the outlook is weighed down by a lack of clarity on trade policy and the path of inflation," Powell said, paraphrasing the report's findings.

In response, companies are adapting their strategies. The Beige Book indicates a rise in promotional activity and deals aimed at enticing price-sensitive shoppers. Some businesses are also accelerating operational shifts, including further supply chain localization and investments in automation, to manage higher input costs. A source familiar with discussions at a major retail trade association said members are "battening down the hatches" for a period of softer demand.

There are notable exceptions to the slowdown. The report highlighted a surge in data center construction, driven by artificial intelligence deployment, which is supporting certain commercial real estate markets and driving localized spikes in energy demand. This activity, however, remains a bright spot in an otherwise softening landscape.

The University of Michigan’s Index of Consumer Sentiment fell 18.2% from December 2024 to June 2025, underscoring the diminished confidence Powell referenced. Rising delinquencies on credit cards and auto loans suggest financially strained households are nearing their limits. Efforts to reach spokespeople for several major national retailers for comment on their forward guidance were not immediately successful.

While the Fed is widely expected to begin a gradual easing cycle later this year, Powell acknowledged that the stickiness of long-term rates and fiscal constraints may mute the impact of any rate cuts. The central bank is now navigating a delicate balance, with the slowdown in spending providing a disinflationary force but the underlying causes—policy uncertainty and tariffs—remaining outside its direct control.