Cloudy Economic Outlook: Can the Consumer Still Carry the Load?

This week, the markets have been confronted with a growing cloud of mixed signals. With the U.S. government shutdown still unresolved and U.S.-China trade tensions flaring once again, the lack of economic data to clarify the broader outlook leaves investors and policymakers navigating unknowns.

Last Friday’s news from Washington regarding China added further layers of uncertainty. While Trump initially suggested he might cancel his meeting with President Xi and threatened steep tariff increases in response to China’s export controls on rare-earth metals, he later softened his rhetoric. Over the weekend, he posted on Truth Social: “Don’t worry about China, it will all be fine,” framing the earlier moves as a reaction to a “bad moment” and emphasising that he wants a cooperative relationship with Xi.

That shift helped spark a rebound in U.S. equities earlier this week after Friday’s sell-off. Nevertheless, the initial escalation and ongoing uncertainty continue to feed volatility, and a potential breakdown in trade negotiations remains a key risk to investor confidence.

Against this backdrop, the Federal Reserve continues to hold its course. Despite the shutdown’s data blackout, several Fed officials have indicated that they remain comfortable with further rate cuts to support the economy. The prevailing view is that rates are moderately restrictive, and given the downside risks, additional easing is likely by year-end.

With official data hard to come by, many are now focusing on consumer behaviour, particularly in Canada and the U.S., where consumer spending has traditionally been a stabilising force.

In Canada, Deloitte’s 2025 holiday outlook shows that while Canadians remain cautious, they are still planning to spend. Holiday spending is forecast to increase by 3%, but consumers are prioritising value and seeking deals. Despite concerns about a potential economic downturn and rising inflation, Canadians appear intent on maintaining the holiday spirit, albeit with a more mindful approach to spending.

South of the border, sentiment is more tempered. U.S. consumer confidence has hit its lowest point in decades, with many anticipating higher prices and curtailing discretionary purchases. However, even in this cautious environment, spending is holding steady. Retailers are seeing upticks in deal-seeking behaviour, and Black Friday sales are expected to play a key role in the holiday season.

The road ahead remains uncertain, but for now, consumer spending, though more cautious, appears poised to play a critical role in supporting the economy through the end of the year.