Consumer confidence took a sharp drop in February, and as uncertainty around consumer behavior—and what news regarding tariffs and other issues each day will bring—abounds, it’s tough to be confident in what that decline could indicate about future consumer spending.
As measured by the Conference Board, consumer confidence plummeted seven points in February to 98.3, the largest monthly decline since August 2021. It marked the third consecutive month of drops, as consumers became more pessimistic about the labor market, future business conditions, and income, citing inflated prices, trade and tariffs, and the Trump administration’s policies as concerns, Stephanie Guichard, senior economist of global indicators at The Conference Board, said in a statement. Consumer sentiment, a similar metric measured by the University of Michigan, dropped 5% in February, and further plummeted 11% in March, the lowest since November 2022, with consumers citing the same concerns.
Historically, these consumer metrics, measured for over 50 years, have been recognized as a barometer for consumer spending, often dipping or rising in tandem. But this confidence drop is different from those in the past; it’s not corresponding with a worse economy as much as inflation and the broader political climate, Joe Schmitt, managing director and co-lead of the Retail Performance Improvement practice at BRG, told Retail Brew, and wallets of consumer groups driving the most spending are largely full, Tamara Charm, partner at Agile Consumer Insights at McKinsey, noted. So what could the confidence drop tell retailers about changing spending patterns?
Spending mixed signals: As retail sales dropped slightly in February, NRF President and CEO Matthew Shay partially attributed this to the decline in consumer confidence and consumers’ efforts to save money. And Schmitt said low consumer confidence has retailers worried we’re entering a recession (a possibility President Trump has recently refused to deny).
But Charm told us post-pandemic spending has broken the consumer confidence mold. In the summer of 2022, when consumer sentiment reached near-historic lows amid soaring grocery and gas prices, consumer spending still grew, marking “for the first time, a real disconnect between very low sentiment and what was happening with spending,” she said.
And what consumers plan to do and what consumers actually do aren’t always aligned, which McKinsey has learned through surveys it conducts asking consumers about spending plans over the next three months.
Charm said in these surveys, McKinsey identifies three categories: “splurge” (where consumers spend more than they intended), “maintain” (where they said they’d decrease spending but largely stayed the same), and “economized” (where they said they’d spend less, and did). Splurge categories have recently been travel and electronics, while sectors like grocery and apparel have been jumping between splurge, maintain, and economized. That’s indicative of consumers adjusting their spending and “trying to rearrange their wallets,” rather than wholly pulling back on spending, Charm said. As they do this, they’re looking for value, not just in price, but also in what a product offers.
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“Whether or not consumer sentiment drops is less important than whether a consumer wants that particular item,” she said. “What consumers are starting to think of is, ‘If it’s an everyday sort of purchase, how can I make trade-offs so that I cannot be spending too much more going forward?’”
Beyond essential categories like food, consumers are looking to splurge on experiential categories like cosmetics, that consumers see as treating themselves (which is why products like chocolate, hair dye, and nail polish fared well in the 2009 recession).
Ready or not: While consumers may not fully be dialing back spending, retailers still need to adjust to the change in habits that a drop in consumer confidence can bring. Promotions are table stakes—a seamless shopping experience, strong customer service, and having the products they’re looking for—particularly those that emphasize value—are more important, Schmitt said. He added we’re reaching a “breaking point” of passing on costs to consumers, so retailers must be judicious in their investments, because consumers are poised to switch brands or even retailers to meet their needs.
“There needs to be a binary filter on, ‘Does this touch the customer or not?’, ‘Is this driving a better customer experience or not?’, ‘Is this driving additional value in the product or not?’” Schmitt said. “And if it’s not, you have to take a really critical lens on all those costs that are impacting your ability to give the customer what they need.”
Ultimately, while confidence and sentiment’s impact on spending may not be as clearly linked as it once was, retailers need to prepare for any scenario, whether consumers spend less, more, or the same.
“Retailers need to think about what they will do differently in each of those cases,” Charm said. “Keep nimble. Think about what are their bestselling SKUs. Make sure to keep those in stock. Think about their supply chain. Make it flexible so that they can be prepared for whatever.”