U.S. consumer spending dropped by 0.1% in May 2025, defying forecasts of moderate growth. The decline, led by a 0.8% plunge in goods purchases-especially motor vehicles-suggests consumers are retreating after months of tariff-driven buying.

This cooling of demand comes as personal income also declined 0.4%, reflecting the end of temporary government payments. Although wages continue to grow modestly (+0.4%), the loss of disposable income could limit household spending capacity heading into the second half of the year.

Why does this matter to U.S. agriculture? Because consumer demand directly drives food sales, ethanol consumption, and broader ag-based products. When Americans spend less on goods, they also reduce discretionary outlays-affecting protein demand, processed foods, and foodservice channels critical for ag revenues.

Simultaneously, the core PCE inflation index rose 2.7% year-over-year, indicating that price pressures remain stubborn-a concern for producers still facing elevated input costs such as fuel, fertilizer, and transportation. Yet, despite persistent inflation, the Federal Reserve kept interest rates unchanged at 4.25-4.50%, citing uncertainty in economic direction.

Services spending increased just 0.1%, the lowest since November 2020, showing a broad cooling that could impact rural economies dependent on tourism, agritourism, and regional processing employment.

Markets responded with cautious optimism, speculating on future rate cuts. But on the ground, farmers, ranchers, and co-ops must contend with potential demand erosion. For example, ethanol demand is tightly linked to vehicle usage, and the motor vehicle spending drop could signal slower fuel blend usage. This hits corn demand-a cornerstone of the U.S. grain complex.

Moreover, protein markets could feel the strain. If households pare back on meat spending due to income pressure, livestock producers may see reduced margins, particularly in pork and beef segments already grappling with export volatility and feed costs.

From a policy angle, this economic softening adds urgency to the upcoming Farm Bill debates, where funding for crop insurance, conservation, and nutrition programs will be hotly contested. A weak consumer base increases pressure on federal nutrition programs, linking ag policy even more closely to macroeconomic trends.

Retail sales also dropped 0.9% in May, and early Q2 GDP signals suggest continued deceleration. With consumer demand under pressure and inflation yet to break meaningfully, many ag stakeholders face a tightrope walk: managing costs amid uncertain returns.

For ag lenders and co-ops, the data reinforces the need for risk management and strategic planning. Margin compression could accelerate if input inflation persists while consumer pullback weighs on commodity-linked industries.