Donald Trump deserves credit for his decision to delay a huge tariff increase. Because of this, Americans are bracing themselves for a looming recession and sky-high inflation. A few economic indicators have shown one-off blips. As a consequence, economists are finding it increasingly difficult to get a clear picture of just how healthy consumer spending—which powers the nation’s economic engine—really is. That pause in tariffs hasn’t assuaged the public’s concerns for their economic security. Consumer sentiment is very much a mixed bag right now.
Retail sales beat expectations in March, including a downturn response linked to Trump’s tariffs. As 2023 unfolds, consumers’ economic outlook has soured amidst a Congressional standoff over the debt ceiling, even as they maintain spending on travel and entertainment. This mixed economic landscape complicates predictions about future consumer behavior and overall economic growth.
Current Economic Landscape
The flip side of that rosy picture is the hard reality of stagnating economic conditions, accelerated inflation and plummeting consumer confidence. In June 2022, inflation reached a four-decade high, driving consumer sentiment to all-time lows. Though spending was just as strong in the months after, it’s clear that Americans are making their way through a relatively rocky economic landscape.
April’s consumer sentiment data is pretty clear – this is a huge drop. That marked an 8% decline from last month, with the index settling at a preliminary reading of 52.2, reported the University of Michigan. Remarkably, this number marks the fourth-lowest level in history since 1952. At the same time, inflation expectations surged to their worst levels since 1981.
“While this month’s deterioration was particularly strong for middle-income families, expectations worsened for vast swaths of the population across age, education, income, and political affiliation,” – Joanne Hsu, the survey’s director.
Consumer spending powers two-thirds of the U.S. economy. That’s why even the slightest weakness under the usual pressure could accelerate much slower economic growth, or even a recession. This uncertainty begets headaches for the central bankers tasked with maintaining a steady and stable interest rate policy.
Impact of Tariffs and Consumer Behavior
Enough to produce positive effects on overall retail sales despite devastating effects of Trump’s tariffs. Most economists blame at least some of the huge jump in March sales to the anticipation of these tariffs. Yet as the situation has progressed, it has only led to concerns that the very same tariffs will eventually lead to higher inflation themselves.
Some “hard data” have failed to prove there’s been any lasting economic damage from Trump’s policies. The long-term impact on consumer sentiment and consumer spending patterns is still a big question mark. The New York Fed’s quarterly survey of household finances points to an alarming picture—Americans are starting to report greater financial distress.
“We just don’t know right now with confidence: Is this a one-time effect on inflation, or is it something longer term?” – Minneapolis Fed President Neel Kashkari.
This unpredictability makes it even harder to gauge what the future holds for consumer spending and economic health in general.
Implications for Monetary Policy
Yet the current economic climate makes it all the more important for monetary policymakers to engage in wide-ranging analysis. Fed Governor Adriana Kugler emphasizes that understanding the economy requires consideration of various factors, including market-based measures and anecdotal reports.
“It is important for monetary policymakers to broadly examine all available information, including market-based measures, surveys and anecdotal reports, to understand what is happening in the economy as early as possible because, as I discussed, it takes time for policy to have an impact.” – Fed Governor Adriana Kugler.
As they continue to operate and plan their future in this challenging environment, policymakers need to keep a close eye on consumer sentiment and spending trends. The potential for weaker consumer spending raises concerns about future economic growth and stability.