Retail sales projections for 2025 come with an exceptionally high level of risk

The forecasts: US retail sales are set to climb 3.1% YoY this year, driven in part by a 4.7% increase in durable goods spending, per Deloitte.

That’s just ahead of our 2.9% US retail sales forecast, which would be a slight acceleration from 2.8% growth last year.

The big assumption: Both forecasts are based on the assumption that the US economy will remain strong as inflation cools, the labor market remains solid, and the US Federal Reserve eases monetary policy.

The tailwinds: The projections come on the heels of a strong holiday season in which a wide array of retailers—including Target, Abercrombie & Fitch, lululemon athletica, and Nordstrom—raised their Q4 outlooks.

• Retailers stand to benefit from generative AI “moving beyond the hype cycle and demonstrating concrete successes,” Deloitte writes, noting that retailers that offered genAI tools like chatbots during the Black Friday weekend had a 15% higher conversion rate than other merchants.
• GenAI and other tools should help retailers boost profits by making their operations more efficient, which is why retail executives in a recent Deloitte survey expect the industry to grow by mid-single-digit percentages on average in 2025.

The headwinds: Several risks to the economic outlook exist, both from Trump administration policy and external factors.

• A sharp hike in tariffs could drive an economic slowdown. The administration announced plans to impose 25% tariffs on Mexican and Canadian imports as early as February 1, with a 10% tariff on imports from China, other BRICS nations, and the EU also under consideration. These measures are expected to alter consumer behavior, with 31% of consumers prioritizing essential purchases and 25% planning to buy fewer items, according to a First Insight survey.
• The threat of mass deportation is already disrupting the labor force, as undocumented workers avoid work to stay out of sight. This negative labor supply shock is hitting the food, services, and manufacturing sectors, driving up costs.
• Everyday costs are rising. Various factors are causing prices to rise, eroding consumers’ discretionary spending power. For example, egg prices have surged after the culling of over 30 million chickens—10% of the nation’s egg-laying population—within the past three months to combat bird flu. Meanwhile, the soaring cost of GLP-1 medications, used by 12% of consumers, is causing consumers to tighten their purse strings.

Our take: The retail landscape is unusually uncertain, driven by significant unknowns surrounding the new administration and the short- and long-term implications of its policies.

That hasn’t escaped shoppers’ attention, as consumer sentiment declined in January for the first time in six months, despite a fifth consecutive month of improving personal finance assessments, per the University of Michigan.

The downturn affected all income, wealth, and age groups, reflecting growing concerns about inflation and unemployment risks.

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