Recent data from the University of Michigan reveals a significant decline in consumer sentiment, marking a transition from the previous Trump bump to a Trump slump. According to the latest consumer survey released on Friday, sentiment dropped by 11% this month, reaching a preliminary reading of 57.9, down from 64.7 last month. This decline represents the lowest level of consumer confidence since November 2022, demonstrating a stark contrast to the highs observed following the US presidential election in December.
Americans are increasingly anxious about President Donald Trump’s escalating and chaotic trade war. The administration's rollout of long-anticipated tariffs has been inconsistent and contentious. Earlier this month, Trump implemented a 25% tariff on imports from Mexico and Canada, only to delay these duties after significant pushback from business leaders. This turbulence continued as the US enforced tariffs on steel and aluminum imports, prompting swift retaliatory tariffs from the European Union and Canada. Such developments have heightened uncertainty, causing Wall Street to become rattled and complicating future planning for many companies, according to recent business surveys.
As worries about the trade war persist, inflation expectations among Americans have surged. This month, survey respondents indicated a rise in inflation expectations for the upcoming year, climbing to 4.9%, up from 4.3%. This marks the highest level of inflation expectations since November 2022 and reflects three consecutive months of substantial increases of 0.5 percentage points or more. Joanne Hsu, the director of the consumer survey, noted that many respondents cited high uncertainty surrounding economic policies, which complicates planning for the future, regardless of individual political preferences.
The uncertainty surrounding tariffs arrives at a time when the US economy exhibits signs of weakness. Consumer spending saw its first decline in nearly two years in January, coinciding with a significant drop in home construction. Executives from major retailers like Target, Walmart, and Delta Air Lines have recently voiced concerns that consumers may feel financially strained, potentially leading to a reduction in spending this year. A closely monitored real-time economic growth forecast from the Federal Reserve Bank of Atlanta predicts a sharp contraction of 2.4% in the current quarter, further underscoring the growing unease among American consumers.
Despite these challenges, the labor market remains a stabilizing factor, with unemployment rates still at historically low levels. Jeff Schulze, head of economic and market strategy at ClearBridge Investments, stated, “The consumer has been the workhorse of this economic cycle and will remain so, even as we navigate this slower consumption phase.” He emphasized that the strength of the labor market is a significant driver of consumption in the United States.
Compounding these economic challenges are rising short-term inflation expectations, fueled by Trump’s tariffs that threaten to exacerbate inflation if a global trade war escalates. This creates a troubling scenario reminiscent of stagflation, where economic growth stagnates or declines while inflation rises. As Federal Reserve officials analyze the mixed signals from the economy, they are set to convene for a policy meeting next week. Tom Bruce, macro investment strategist at Tanglewood Total Wealth Management, remarked, “You essentially have opposing forces in the economy. Tariffs pose a threat of higher prices, while declining sentiment raises concerns about growth, deterring business investment and hindering economic progress.”
In light of the current economic landscape, Federal Reserve policymakers have indicated a preference to maintain steady interest rates in the near term, awaiting clearer indications of how the economy will react to Trump’s myriad policy changes. Fed Chair Jerome Powell highlighted that the central bank’s response will depend on “the net effect of these policy changes,” which include not only tariffs but also a stringent crackdown on immigration and significant federal workforce layoffs. Powell emphasized, “It’s not just about tariffs; it’s about growth and all the broader implications of these sweeping changes in economic policy.”
