Consumer confidence has been on the wane all year, and economic realities aren’t helping much. Yet retailers just wrapped up the month, and the first quarter, with surprising strength.
In March, consumer sentiment hit a new low as inflation rose — the highest spike in four years — as the Iran war took a toll on energy supplies and people’s nerves. In the mostly discretionary segments covered by Retail Dive, though, retail sales surged more than 8%, with gains in most categories. That came on top of a nearly 5% increase in February and a nearly 6% increase in January.
“Overall, a solid March rounds off a good start to the year for retail,” GlobalData Managing Director Neil Saunders said in emailed comments.
But he warned that economic storm clouds are gathering, and the numbers aren’t all that they seem.
"The highest percentage of wealth owners and the highest percentage of income deciles are the ones that are driving most of the spending."
Dan North
Senior Economist, Allianz Trade North America
Consumers are stressed on multiple fronts, including mounting debt and rising prices on necessities like housing, groceries and most recently — thanks to the Iran war — fuel. This is making it more difficult to adapt as easily as they often do, according to research from the Kearney Consumer Institute, which noted that it takes a while for sales data to catch up with sentiment data.
Higher-income shoppers are beefing up the overall retail sales numbers, while lower-income shoppers skew the confidence surveys because there are many more of them, according to Dan North, senior economist at Allianz Trade North America.
“The highest percentage of wealth owners and the highest percentage of income deciles are the ones that are driving most of the spending,” he said by phone.
Still, while lower-income households are particularly under pressure, “even relatively insulated consumers, such as those with significant equity in the market, face real vulnerability if a sharp correction arrives,” according to the Kearney researchers led by Katie Thomas. Shoppers of all income levels have already begun to trade down by buying lower-priced private labels or heading to discounters. The consumer is becoming increasingly attuned to value and is ready to cut out any item, subscription or retailer that doesn’t seem worth it, Thomas found.
Tax refunds floated many purchases last month. Refunds were up 17% (or more than $40 billion) compared to last year and have gone to 3 million more U.S. households, according to Wells Fargo economists Tom Porcelli and Shannon Grein.
“We have data through March and, at the moment, the consumer is hanging in there just fine in the wake of the Iran conflict,” they said in a Tuesday report. “Gas prices are higher, inflation fatigue is real, and sentiment has softened as inflation expectations moved up following the conflict. And yet with all of that, the hard data continues to point to resilient consumer spending, at least for the moment.”
“Gas prices are higher, inflation fatigue is real, and sentiment has softened as inflation expectations moved up following the conflict."
Tom Porcelli and Shannon Grein
Economists, Wells Fargo Economics Group
But pressures will mount the longer the Iran war drags on, they also said.
Another boost to March spending came from Easter, which fell earlier this year, several analysts noted.
“Admittedly, this does not have a huge impact, but it provides the icing on an already very well-turned-out cake,” Saunders said. “The flip side is that April growth may be more subdued by the calendar shift.”
Higher prices are masking more subdued volume numbers, he and others said. And inflation will continue to take a toll in the coming months. Gas prices surged more than 15% from February to March, and food and housing costs were up in the 12 months through March, according to a report from Moody’s Ratings analysts led by Mickey Chadha. They expect real growth in personal consumption expenditures to drop to 1.5% this year, down from 2.5% in 2023 and 3% in 2024.
“We expect high prices for essentials and slowing employment picture coupled with the conflict in the Middle East will put a damper on U.S. consumer activity in 2026,” Chadha said.
So while retail sales have been robust so far this year, that may be misleading, according to Marshal Cohen, chief retail industry adviser at Circana.
“Retailers are navigating an environment where calendar shifts, promotions, and temporary tailwinds are masking deeper vulnerabilities in consumer spending,” he said in emailed comments.
