The bottom line? Consumers are increasingly worried about tariff fallout
- Consumer sentiment has done a 180 from the post-election bump that often accompanies a change in leadership in Washington, D.C.
- Positive expectations that arose from anticipated tax cuts and regulatory reform and an anticipated tailwind for the economy has given way to the reality of another key element to President Trump’s economic strategy: tariffs. Right now, the focus is entirely on the uncertainty around trade policy and the impact of higher levies on imported goods. As of now, everything else pales in comparison.
- A dour consumer outlook is likely to lead to households reining in spending either in anticipation of tougher economic conditions ahead or in response to higher prices on a range of goods.
By the numbers: Extreme pessimism
- Consumer sentiment dropped sharply in April, coming in at 50.8 — very near the index’s lowest reading ever of 50.0 reached in June 2022. It was also well below forecasts for a more muted decline to 54.0.
- The April reading marks the fourth consecutive decline to start the year after its most recent peak in December.
- Notably, the survey period ended on April 8, and didn’t reflect the soaring stock market performance on Wednesday or yesterday’s sell-off.
- The survey was also completed before the March report on consumer inflation, which was better than anticipated. Over the past year, the consumer price index has continued to slowly recede toward the Fed’s 2% target. There’s little confidence that trend will continue though. Inflation appears to be at an inflection point, with the real debate over how much it will rise in the coming months.
- Even so, a positive reading on March inflation wasn’t going to assuage fears around the inflationary impulse yet to come as the impact of tariffs become apparent.
- Year-ahead inflation expectations continued to surge, rising from an already elevated 5.0% in March to 6.7% — the highest level since 1981.
- Both key components to sentiment were exceptionally weak, as consumers acknowledged a deterioration in their views of current conditions and even greater pessimism in what lies ahead.
Broad thoughts: It’s the uncertainty
- The upending of trade relations may ultimately bear fruit if more favorable pacts can be reached with America’s trade partners. That’s a possibility, and there are already indications that some are willing to negotiate. In the meantime, collateral damage is already evident with more fallout anticipated, as the impact of tariffs push prices higher and, most likely, cause growth to slow.
- With trade policy seemingly changing by the day, it’s not just the imposition of tariffs that presents the problem, but the extreme uncertainty. Significant policy changes can be difficult to swallow, but it’s still possible to adapt if one knows the rules of the game. When the rules of the game are constantly changing, effectively planning ahead becomes virtually impossible.
- For the consumer sector, it’s that lack of clarity that’s weighing heavily on confidence, raising the specter of higher prices, slower growth, tougher personal financial conditions, and reduced capacity and appetite for discretionary spending. It’s also increasingly seeping into worries about labor market conditions amid a growing number of layoff announcements.
- But it’s not just a challenge for consumers. Small business owners, executives, and investors are also trying to varying degrees to understand the scope and scale of change in an environment in which doing so has been exceptionally difficult.
- There’s no telling when conditions may turn. In the meantime, a further degradation in hard economic data related to inflation, growth, and jobs should all be monitored closely. As financial conditions continue to tighten, the continued dimming in the collective consumer mood — and a reduction in household consumption — is a growing risk.
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