Consumers are driving the school bus

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US gross domestic product (GDP) expanded at its fastest pace in nearly two years in this year’s second quarter. The US Bureau of Economic Analysis (BEA) had already reported a hot preliminary gain of 3.3%, but this week heated it further to a final gain of 3.8%, far removed from GDP’s decline of 0.6% in the first quarter. This unexpected revision was largely a function of much stronger-than-expected personal consumption. That rose 2.5% in the second quarter, up from a preliminary gain of 1.6% and significantly stronger than the first quarter increase of only 0.6%. Given the potential for a strengthening labor market and moderating inflation, economic growth could accelerate in the second half of this year. On Friday, the Atlanta Federal Reserve Bank boosted its GDPNow estimate for third quarter GDP growth from 3.4% to 3.9%.

Back-to-School (BTS) spending is earning an A During the first three months of this important season through August 2025, BTS retail sales rose a solid 4.2% year-over-year (y/y), its headiest trend since 2022. It’s nearly double last year’s tepid pace of only 2.3%, the weakest BTS results since the Global Financial Crisis.

Monthly results revised up across the board Nominal retail sales in August were better than expected, rising 0.6% month-over-month (m/m); consensus had expected only 0.2%. July results were revised from a 0.5% m/m gain to a 0.6% increase, and June was also revised up by a tick to a strong final increase of 1.0%. It was this June increase that had a positive bearing on the final revision for personal consumption and GDP in the second quarter.

Nine of the 13 retail-sales categories were positive in August, led by substantial increases of 2.0% for e-commerce sales and 1.0% for clothing. July’s solid results were boosted by Amazon’s “Prime Day” on July 8-11. That garnered sales of $24.1 billion, according to the retail giant.

Control results, which exclude spending on food, gas, autos and building materials, and are a direct input into the Commerce Department’s GDP calculations, rose in August by a strong 0.7% m/m versus a consensus expectation for 0.4%. July control results rose an unrevised 0.5% m/m, and June leapt by a final gain of 0.9% m/m (up from 0.8%).

BTS is a four-month retail season Spending on school supplies, electronics, apparel and dorm-room furnishings and the like actually begins in June. July and August are the heart of season. But many parents and students reserve some of their clothes budget until September, to see what fashions are popular with the “cool” kids and to take advantage of Labor Day sales.

Implications for the holidays? With June, July and August results now in the books (September won’t be reported until October 16), BTS spending thus far has risen by a considerable 4.2% y/y, a three-year high. This time last year led to a comparably tepid gain of 2.3% in 2024. During this year’s Easter/Passover “Marpril” season, retail sales rose a powerful 5.0% y/y. That was also a three-year high, certainly stronger than the 3.0% y/y gain in 2024.

But a recent PwC survey found that the upcoming Christmas/Hanukkah season could see a sharp decline of 5.3% y/y in retail sales in 2025 versus an actual sales increase of 3.9% y/y last year. The last time sales declined to that level was during the pandemic, when it plunged 7.6% in 2020. Tellingly, retail sales rose 5.8% y/y that Christmas, so we’re taking their survey estimates this season with a huge grain of salt.

Marpril, BTS and Christmas combined historically share a 73% positive correlation over the past 30 years, and personal consumption accounts for 70% of GDP. So, unlike PwC, we’re expecting a solid holiday season.

Savings rate declines The personal saving rate spiked from 6.8% pre-pandemic in January 2020 to a record 31.8% in April 2020 and to 26.2% in March 2021, due to generous fiscal stimulus benefits from President Trump’s CARES Act and President Biden’s American Rescue Plan, respectively.

The personal savings rate then plunged to a 15-year low of 2.2% in June 2022, which helped drive robust consumer spending in 2021 and 2022. Over the past three years, however, the savings rate rose to 5.7% in April 2025, likely due to trade and tariff fears. An increasing number typically means less spending on retail goods and services, which slows economic growth. But as those concerns have faded over the past four months, the rate has fallen to 4.6% in August 2025, helping to boost BTS spending.

Consumer divergence persists We believe that consumers — particularly at the lower end of the income and wealth spectrum — have been tightening their belts for the past three years due to a deteriorating labor market, as the unemployment rate has risen from 3.4% in April 2023 to 4.3% in August 2025. The Fed’s September Summary of Economic Projections forecasts it to hit 4.5% by the end of this year before beginning to gradually decline. However, the top 10% of Americans have been buoyed by the “Wealth Effect,” due to record high stock and home prices. According to Moody’s, the top 10% account for half of consumer spending, which in turn accounts for 70% of GDP. If the wealthy keep spending, the economy will remain strong.

Inflation hurt, but not slain After spiking to a four-decade high in 2022, inflation has plunged to a four-year low this spring, before edging up in recent months, due to the one-time effect from tariff increases. The nominal Consumer Price Index (CPI) has plummeted from a 41-year peak of 9.1% in June 2022 to 2.3% in April 2025. Inflation rose to 2.9% in August 2025. The core Personal Consumption Expenditure (PCE) index — the Fed’s preferred measure of inflation — has declined from a peak of 5.6% y/y in September 2022 to 2.6% y/y in April 2025. It grew at a 2.9% rate last month. The Fed’s SEP also forecasted that core PCE will grind back down to its 2% target by year-end 2028.

Read more about our views and positioning at Capital Markets.

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