The bottom line? Consumers are wary
- Today’s final release for March confirms the trend toward worsening consumer sentiment in 2025. The initial post-election surge in optimism has now given way to the new reality of uncertainty and fears of resurgent inflation and slower growth.
- What will the speed and magnitude of change in fiscal and trade policy mean for the economy when the dust settles? Consumers are struggling with that question — one that’s exacerbated by the fact that there are still more questions than answers on multiple fronts.
- How much prices might rise remains an open question, as trade policy and tariffs have been a moving target and may be for some time to come.
- Economist forecasts for inflation have been more restrained than consumer expectations, which could suggest that consumer angst may ultimately prove to be worse than the economic reality. Economists generally undershot in their forecasts in 2022 as well, raising the possibility that they could be underestimating upward pressure on prices again.
- For now, inflation has reemerged as a significant, and growing, concern for consumers — one that will undoubtedly influence household spending decisions in the near term.
By the numbers: Sentiment index slumps to lowest point since July 2022
- Consumer sentiment fell sharply in March, dropping to 57.0, a more pronounced deterioration than economists had expected and a further downward revision from the 57.9 reading just two weeks ago.
- The reading marks the third consecutive decline to start 2025 and the lowest reading since July 2022, when consumers were struggling under the weight of the highest inflation in decades and warnings of a potential recession brewing. Inflation subsequently eased and the United States sidestepped a recession, leading to a slow rebuild in consumer confidence.
- Now, it’s the stagflationary combination of higher inflation and weaker growth that’s the catalyst for heightened consumer anxiety.
- The most significant deterioration has been in consumer expectations, which have dimmed considerably in recent months, with that component of the index falling to 54.2 from 64.0 just a month ago and down 30% over the past year.
- February’s better-than-expected CPI report was a relief, but today’s PCE was anything but reassuring. The 0.4% increase was the biggest monthly jump in a year. Whether that’s a blip or an early warning of a more prolonged acceleration in price pressures remains to be seen.
- Against that backdrop, it’s not surprising that consumer inflation expectations have also surged, with the one-year expectation rising to 5% and the outlook over the next five to 10 years topping 4%.
Broad thoughts: It’s not just tariffs, but the lack of clarity
- The near-term challenge presented by tariffs and their impact on inflation aren’t lost on consumers — that would be impossible given the steady drumbeat of developments that placed trade policy on the daily news docket since January.
- The scope of announced cuts across various federal government agencies has also raised questions about the collective impact on displaced workers and various programs.
- In recent months, survey results had been bifurcated, with self-identified Democrats and Independents souring on the outlook, while self-identified Republicans held a more optimistic tone. That divide is showing signs of closing, with a more pessimistic outlook being adopted by respondents across the political spectrum in March.
- Broadly though, it’s not just the fact that the rules of the game have changed that has dimmed the collective consumer mood, but the fact that there’s little clarity about what the rules will be when the dust settles or the subsequent effects.
- When you don’t know what’s coming, it’s harder to plan. In the face of growing uncertainty, consumers are left with tough decisions. In some cases, that may mean accelerating purchases out of fear of even higher prices ahead; in others, it may translate to pulling back on spending altogether. In either case, the murky outlook weighs on confidence.
- There’s already evidence that consumers may be pulling in the reins on spending. The February increase in personal consumption was weaker than expected; adjusted for inflation, the increase of just 0.1% was tepid. In the absence of a rebound in household spending in March, consumption’s contribution to GDP for Q1 is shaping up to be relatively weak.
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