President Donald Trump recently laid out his administration’s skinny budget proposal, calling for deep cuts to non-defense discretionary spending in the upcoming fiscal year. These changes are fundamentally reshaping the U.S. economic landscape. The suggested 23% cut would refocus the federal government’s spending priorities. Yet, it is under attack from fiscal conservatives within Republican Party ranks. While all of these changes are happening, U.S. consumer sentiment continues to plummet. This drop, coming right after Trump’s election win in November, makes the economic outlook even hazier.
In addition to spending cuts, Trump’s tax initiatives related to social security payments and overtime pay may encounter resistance from Republican fiscal hawks in the Senate. This opposition raises questions about the feasibility and timing of the proposed tax changes, which are intended to stimulate economic growth. How these policy proposals interact with and provoke market reactions will be critical for the larger economy.
Market Reactions and Consumer Sentiment
After the opening shock of the “Liberation Day” proclamations, U.S. financial markets rebounded to recoup most of their advance losses, but it shouldn’t have been that easy. This rebound is a positive sign of resilience among investors even amid persistent uncertainties about trade policies and outlooks toward the economy. Nonetheless, the portrait of waning consumer sentiment presents a contradiction for consistent market optimism.
Unfortunately, since Trump’s election, consumer sentiment has soured deeply, which may dampen consumer spending in the medium to long term. The reasons for the decline are many. Fears about the global trade policy and its impact on day to day life are central. Despite this downturn, consumer spending in March showed strong performance for big-ticket items such as cars and investments in equipment, indicating that some sectors remain robust even amidst broader apprehensions.
On the frontline, the leisure and hospitality sectors will be hit hardest. This massive drop in foreign visitors is projected to hit major areas of the U.S. particularly hard. This drop is especially alarming for places that are dependent on tourism dollars. With consumer sentiment likely to change for the foreseeable future, it will be impossible for businesses that rely on foreign tourism to ever return to profitability.
Trade Policies and Economic Growth
That was one of the major goals of Trump’s controversial decision to rewrite trade rules – to have a clear, tangible impact on the U.S. economy. It’s no wonder economists were shocked by the deep drop in first quarter GDP. This fall came as U.S. businesses scrambled to get goods in before new tariffs scheduled to be enacted. This strategy is a better indication of businesses’ efforts to offset expected increases in costs as a result of new trade policies.
Looking ahead to second quarter GDP expectations are more positive. It’s expected to return to the black soon, as imports begin to turn around. The new net positive trade dynamic should help offset pressure on manufacturing sectors and benefit the national economy in net economic growth.
Many economists recognize this is where the short-term potential gains lie. They caution that simply reauthorizing the 2017 Tax Cuts and Jobs Act isn’t enough to supercharge the U.S. economy. According to analysts, cutting corporate tax rates or changing regulations on tips will not provide as much economic benefit. The agreement continues to be that a much broader approach would be needed to jump start long overdue sustainable growth.
Inflation and Economic Outlook
Inflation is still a big worry given projections that it will only approach the target by the end of 2026. The topic that has driven inflation more than anything else is the housing market, which makes up a staggering 40% of the CPI basket. This is particularly true as changes in housing prices immediately impact headline inflation measures and consumers’ real income.
The broader economic landscape is shifting under our feet. Economists’ outlooks on the likelihood of a recession have gone from a basic yes/no answer 18 months ago to a nuanced, skeptical approach now. On one hand, there are notable indicators of strength, such as robust spending on durable goods. Yet other indicators show weakness, notably in consumer confidence and international visitors.