Wealthy Americans, middle-class citizens to cut spending, impacting consumption: Is it the Trump effect?

The US economy, which had been running at full throttle when President Donald Trump took office, is showing signs of strain just weeks into his term. Consumer confidence has faltered, the stock market is in turmoil, and layoffs are on the rise.

Middle-class Americans and wealthy investors alike are feeling the squeeze.

Shoppers are cutting back on spending, rattled by market volatility and Trump’s escalating trade wars, raising concerns about the strength of the world’s largest economy.

Trump has refused to rule out the possibility of a recession, while recent stock market losses have eroded the wealth of higher-income Americans– key drivers of US consumer spending.

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The stock market’s sharp downturn in recent weeks is not just a reflection of economic unease– it could become a cause of it.

Investors initially welcomed Trump’s return to the White House, but enthusiasm has soured as concerns mount over his administration’s aggressive and unpredictable tariff policies. The S&P 500, which soared 53 per cent across 2023 and 2024, has fallen 4.1 per cent so far this year.

Gabriel Chodorow-Reich, a Harvard economist, estimates that a 20 per cent drop in stocks in 2025 could shave as much as a percentage point off economic growth. And the effects could ripple far beyond Wall Street.

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“In a hyper-financialised economy like America’s, asset prices can lead the economy, not just the other way around,” Wall Street Journal quoted Alex Chartres, a fund manager at Ruffer, as saying. “A decline in asset markets creates the risk of weakening conditions in the real economy.”

For years, rising stock prices have fuelled consumer spending, particularly among the wealthiest Americans. The top 10 per cent of earners, who now account for nearly half of all US consumption, have benefited the most.

Data from the Federal Reserve shows that as of 2022, families in the top 10 per cent held an average of $2.1 million in stocks, making up 32 per cent of their net worth– up from 26 per cent in 2010. Their spending surged by 58 per cent over the past four years, partly powered by stock market gains.

But it is not just the ultra-rich who are exposed. The rise of retail investing means that a record 43 per cent of American households’ financial assets were in stocks at the end of last year, according to Fed data.

That makes the US economy particularly vulnerable to a downturn in asset prices. A sustained market rout could trigger a significant pullback in spending– what economists call the “wealth effect.” Deutsche Bank estimates that if stocks had remained flat last year instead of rallying, consumer spending growth would have been closer to 2 per cent instead of 3 per cent.

Many Americans have a mental benchmark for their retirement savings. If falling stock prices push them further from their goals, they may rein in spending, said Matthew Luzzetti, Deutsche Bank’s chief US economist.

A downturn in the markets could also reshape corporate decision-making. Business leaders often fixate on their company’s share price when planning hiring and investment strategies. After the Nasdaq lost a third of its value in 2022, the tech sector responded with sweeping job cuts and spending reductions.

Retail sales take a hit

Retailers, many of whom reported strong sales late last year, are now warning of a slowdown. Footfall at US stores fell 4.3 per cent year-on-year in early March, according to consultancy RetailNext, continuing a decline that began in January. Mobile data tracked by Placer.ai suggests that major retailers, including Walmart, Target, and Best Buy, are seeing fewer visitors, Financial Times reported.

On Friday (March 14), the University of Michigan’s consumer sentiment index recorded its third consecutive monthly decline, hitting its lowest level since November 2022. Inflation expectations are also climbing, adding to household anxieties.

Some corporate executives are already sensing a shift in consumer behaviour. Delta Air Lines, Foot Locker, and Brown-Forman, the maker of Jack Daniel’s whiskey, have all warned that customers are becoming more cautious.

Retail sales dropped 0.9 per cent in January– the biggest monthly decline since 2023– though some economists attributed it to unusually cold weather. February’s figures, due to be released Monday, will provide further clues about whether consumer spending is beginning to falter.