Can unspent outputs only get smaller? It seems that when transactions occur the outputs only get smaller and are never aggregated. There is no apparent way to combine multiple outputs into a single output. The problem I see with this is that eventually all bitcoin outputs will be so divided that it will become impractical to trade them.

For example, imagine a miner receiving thousands of small "fees" of a few dollars each. If the fee keeps growing, it could make it a money losing proposition for a miner to use a fee output that they received previously. The fee is currently around $17 for a simple transaction, so basically what that means is that any output of less than about 0.001 bitcoins is essentially worthless.

Does this foreshadow the death of bitcoin when all the outputs are eventually divided into impractically small amounts?
A transaction can spend from multiple unspent outputs and create fewer outputs than were consumed. So it is is possible to aggregate UTXOs.