Consumers are spending less. What that means for the global economy.

The latest retail sales report missed the mark on Monday. Sales rose by 0.2% in February from January, below consensus forecasts for a 0.7% increase. Stores selling discretionary products had a rough month as consumers prioritized spending on essentials.

The report provides a second month of hard economic data that backs up what soft data—such as consumer sentiment—have been pointing at for weeks now. Consumers are curbing their spending in response to growing caution about the economy.

Uncertainty around inflation, federal layoffs, volatility in the stock market, and the Trump administration’s economic policies, particularly tariffs, have clouded the outlook of many Americans. Indeed, consumer sentiment has dropped for the past three months, sliding as much as 11% in the first weeks of March from February. And although sentiment and spending haven’t correlated closely in the past five years, they are now bridging the gap.

“While consumer health remains good, Fitch is watching the recent news flow around tariffs, inflation and equity market volatility and its impact on consumer sentiment, particularly in discretionary categories," said David Silverman, senior director at Fitch Ratings. “Fitch expects sluggish spending on these segments to continue through 2025 as consumers remain choiceful and value-focused."

That will weigh on the broader economy this year. Consumer spending has driven gross domestic product growth in the postpandemic years, offsetting weakness in other sectors such as manufacturing—which remains sluggish. The New York Fed’s Empire State index plunged in early March, signaling a drop in factory activity.

Following the retail sales release, the Federal Reserve Bank of Atlanta’s GDPNow revised its estimate for the first quarter to a 2.1% decline in GDP growth, down from an estimate for 1.6% drop in early March. GDPNow roughly forecasts the official GDP estimate before it is released.

The Bureau of Economic Activity will publish its advance estimate for first-quarter GDP on April 30. Meanwhile, economists will be looking to the Fed for real-time insight into economic growth when policymakers release an updated version of their summary of economic projections Wednesday.

There is one silver lining, notes Richard de Chazal, a macro analyst at William Blair—any weakness is starting from a solid base, which could help offset the worst effects of an economic downturn. Many households were able to pay down their debt and increase savings during the pandemic years and the labor market has been tight enough to drive substantial income gains.

“While we could see some deceleration in growth, a full recession in the absence of a major balance sheet shock or sharp tightening of both fiscal and monetary policy still looks unlikely, although the risks are clearlypointing to the downside," he added.

But it isn’t just the U.S. that could see growth sputter in the coming years. As the old saying goes, when America sneezes, the rest of the world catches a cold—and President Donald Trump’s trade policies are shaping up to hit global growth and raise inflation, according to a report released by the Organization for Economic Co-operation and Development on Monday. The OECD is estimating global GDP growth could moderate to 3.1% in 2025 and 3% in 2026 from 2024’s 3.2% increase, driven by economic slowdowns across several large economies, including the U.S., Brazil, Canada, and Mexico.

The projections assume bilateral tariffs between the U.S. and trade partners Canada and Mexico will rise by 25% in April. Activity would be stronger and inflation lower in all three economies if the tariff increases are lower or confined to a smaller range of goods, the OECD said.

“Greater policy uncertainty can be expected to hold back spending decisions by companies and households, particularly on longer-term items such as fixed capital investment and durable goods," the report reads.

Write to Sabrina Escobar at sabrina.escobar@barrons.com