American consumers continued to open their wallets in July, driving real consumer spending up 0.3 percent for the month—the strongest showing since March’s pre-tariff surge. But beneath the headline numbers, a more complex story is emerging of households making increasingly tough choices about where to spend their money, according to a new report from Wells Fargo Economics. The July uptick brought annual consumer spending growth to 2 percent, powered by a rebound in durable goods purchases that had stumbled through the spring months. Spending on big-ticket items jumped 1.9 percent in July, with much of the increase concentrated in motor vehicles and parts—a category that has been “whipsawed amid tariff pricing concerns.”
The automotive boost helped offset what economists see as early signs of tariff impact elsewhere in the economy. While durable goods made a comeback, Americans appear to be pulling back on the experiences and services that have driven much of the post-pandemic recovery.
Recreation services posted the smallest increase of any services category in July, while spending on food services and hotel accommodations actually declined. This shift represents what Wells Fargo describes as “the largely unnoticed early manifestation of tariff impact on consumer spending”—a trend decline in discretionary services categories. The pattern suggests consumers are becoming more selective with their dollars. “A consumer that is cutting back on going out to eat and not booking as many hotel stays may not signal disaster, but it does point to the sort of budgeting decisions that households make when under pressure,” the report notes. This behavioral shift comes even as Americans are earning more. Personal income rose 0.4 percent in July, with wages and salaries surging 0.6 percent—the strongest monthly increase of the year. Real disposable personal income climbed 0.2 percent, indicating that for now, income growth is outpacing price increases.
However, the inflation picture remains challenging for both consumers and policymakers. The core Personal Consumption Expenditures (PCE) price index—the Federal Reserve’s preferred inflation gauge—rose 0.3 percent in July, pushing the annual rate to 2.9 percent. That marks the fastest pace since February and could complicate the Fed’s efforts to bring inflation back to its 2 percent target. The inflation acceleration was broad-based, with two of the three largest spending increases in July occurring in services categories: financial services and housing. This presents what Wells Fargo economists see as “a potential challenge for the Fed as it tries to steer inflation lower,” particularly as service prices show signs of stalling in their recent downward trend.
Despite July’s solid performance, Wells Fargo remains cautious about the spending outlook for the remainder of 2025. The report expects consumer spending to flatten in the second half of the year as “persistent moderation in the labor market will make consumers more discerning about where they are willing to spend.” The sustainability of recent income gains also remains in question. The robust wage growth that helped support July spending will require continued strength in the job market—an outcome that economists view with skepticism given recent employment trends. The next major test will come with August employment data, which will provide fresh insights into whether the labor market can maintain the momentum needed to keep consumers spending through the crucial back-to-school and holiday shopping seasons ahead.
