WASHINGTON, Feb 25 (Reuters) - In a significant economic development, U.S. consumer confidence experienced its sharpest decline in three-and-a-half years in February. Simultaneously, 12-month inflation expectations surged, reflecting growing anxiety among Americans regarding the potential adverse economic impact of President Donald Trump's policies.
The Conference Board's survey, released on Tuesday, highlighted that current administration policies were a prominent concern among respondents. This survey followed last week's reports indicating sharp declines in both business and consumer sentiment for February. Trump's tariffs on imports were frequently mentioned as a major issue in surveys conducted among households and businesses.
Economists have cited unprecedented layoffs of federal government workers as a factor negatively affecting consumer sentiment. This poses a risk to consumer spending, which is a critical driver of the economy. "Americans are increasingly pessimistic about the outlook," noted Christopher Rupkey, chief economist at FWDBONDS. He warned that the economy could stall in the first quarter as consumers retreat from spending.
The Conference Board's consumer confidence index fell by 7 points, marking the largest drop since August 2021, reaching 98.3 this month. This was below economists' expectations, who had forecast a decline to 102.5. This third consecutive monthly decrease brought the index to its lowest level since June 2024.
The survey, conducted up to February 19, showed declining confidence across all age groups, particularly among those aged 35-55. Nearly all income groups reported a decline, except for households earning less than $15,000 and those earning between $100,000 and $125,000 annually.
There was a notable rise in mentions of trade and tariffs, reaching levels not seen since 2019, according to Stephanie Guichard, senior economist at the Conference Board. Following Trump's election, business and consumer sentiment had initially soared, driven by hopes for a less stringent regulatory environment, tax cuts, and low inflation. However, the imposition of additional tariffs, such as a 10% levy on Chinese imports and potential tariffs on imports from Mexico and Canada, has raised concerns.
The imposition of tariffs on automobiles, semiconductors, and pharmaceutical imports is looming. Economists warn that these tariffs, essentially a tax, could lead to higher prices for inflation-weary households. Concurrently, tens of thousands of federal government workers have been laid off by Elon Musk's Department of Government Efficiency (DOGE), an entity established by Trump to reduce public spending. These layoffs and spending cuts may reduce economic activity and potentially lead to private sector job losses.
In response, stocks on Wall Street traded lower, the dollar weakened against a basket of currencies, and U.S. Treasury yields declined. Although economists are not yet predicting a recession, they anticipate a prolonged period of slow economic growth and high inflation, putting the Federal Reserve in a challenging position.
The Fed has paused its interest rate cuts while monitoring the economic impact of the Trump administration's policies. Since September, the Fed has reduced its benchmark overnight interest rate by 100 basis points as part of its policy easing cycle, following substantial rate hikes in 2022 and 2023 to combat inflation.
Consumers' average 12-month inflation expectations rose to 6%, the highest since May 2023, up from 5.2% the previous month. The labor market differential, which reflects respondents' views on job availability, declined to 17.1 from 19.4 in January. Financial markets believe that labor market weakness could prompt the Fed to resume interest rate cuts soon.
Economist Abiel Reinhart from J.P. Morgan commented that the current labor market differential should still align with an unemployment rate in the low 4% range. However, the recent decline over two consecutive months suggests that the labor market may not be re-tightening as hoped.
Consumer intentions to purchase motor vehicles over the next six months have decreased, and buying plans for big-ticket items like washing machines and electronics have also fallen. While planned spending on services remained relatively stable, there has been a slight shift in consumer priorities toward personal and health care, as well as movies and live entertainment, at the expense of streaming and travel.
Vacation plans have continued to decline. Although the relationship between confidence and consumer spending is weak, the survey aligns with economists' expectations for a significant slowdown in consumption and economic growth in the first quarter. "This adds to the building evidence that economic growth will moderate this year," said Ben Ayers, senior economist at Nationwide, noting that more households are tightening their belts in response to economic uncertainty.
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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
