In recent times, American consumer sentiment has hit an unprecedented low, as evidenced by a significant 11% drop this month, resulting in a preliminary reading of 50.8—as reported by the University of Michigan. This figure is notably striking, being the second-lowest recorded since 1952, landing lower than any reported during the Great Recession. Such figures suggest an overall pessimism regarding economic conditions that is alarming for both consumers and policymakers.
The negative sentiment is largely influenced by President Donald Trump’s aggressive trade war which has raised fears of escalating inflation. Recent data indicates that this negativity has taken a firmer grip on American consumers, particularly in light of Trump unveiling substantial tariffs the previous week. This sentiment shift was acknowledged by Joanne Hsu, the director of the University of Michigan survey, who noted that the decline in consumer confidence was widespread, cutting across demographics such as age, income level, education, geographic region, and political affiliation.
Moreover, since December 2024, consumer sentiment has plummeted by more than 30%, spurred by mounting concerns over the implications of the ongoing trade war. The Federal Reserve, as well as Wall Street analysts, is observing this changing sentiment closely as consumer spending constitutes approximately 70% of the U.S. economy. There’s apprehension about whether this drop in consumer confidence will translate into actual spending declines, which could further impact economic stability.
In a recent move, President Trump announced a temporary suspension of a massive tariff hike on several countries for ninety days, while maintaining a 10% baseline duty on all imports to the U.S., in addition to select tariffs on specific goods. Interestingly, China was excluded from this reprieve, continuing a contentious trade standoff between the two economic powerhouses, which saw the latter increasing their retaliatory tariffs on U.S. imports to an astonishing 125%. It’s worth noting that the Michigan survey’s time frame, which extended from March 25 to April 8, does not capture public responses regarding the recent tariff delay.
Examining consumer sentiment in the context of economic behavior reveals the nuanced relationship between “soft data,” which encompasses surveys like that of the University of Michigan, and “hard data,” representing measurable economic activity such as retail sales. Surprisingly, while surveys indicate deteriorated consumer sentiment, actual hard data shows that employment rates remain strong with employers hiring rapidly. Despite some recent underperformance in retail sales, consumers seem reluctant to cut back their spending.
This paradox was highlighted by Federal Reserve Chair Jerome Powell, who noted how negative survey results do not always correlate with consumer spending behavior. He mentioned that individuals continued to spend despite the pandemic and high inflation. The wealthier segments of society have been pivotal in sustaining economic momentum in the U.S. However, this spending is now under threat from the market unrest provoked by ongoing tariff policies.
Bill Adams, chief economist at Comerica Bank, articulated that the confidence of affluent consumers, who have benefitted from significant stock market advancements, is crucial for continued economic growth. Should uncertainties linked to tariffs persist, it could erode their willingness to spend, potentially destabilizing the economy.
In tandem with this, Larry Fink, the CEO of BlackRock, drew parallels to the economic atmosphere leading to the 2008 financial crisis. Jamie Dimon, CEO of JPMorgan Chase, reinforced this sentiment, indicating that economic turbulence, influenced by global geopolitical factors, poses considerable challenges.
A critical aspect of these developments is understanding consumer perceptions of inflation. How Americans anticipate price changes can greatly influence economic outcomes. Currently, inflation expectations are trending upward, with anticipated rates reaching 6.7%, a jump from 5% in the previous month, marking the most significant expectations since 1981. Such trends, if left unchecked, could complicate the Federal Reserve’s strategies for monetary policy aimed at curbing inflation.
Lastly, Dallas Fed President Lorie Logan expressed concerns about entrenched high inflation expectations, which have historically made economic recovery more arduous, resulting in prolonged labor market weaknesses and deeper economic scars. With consumers currently feeling acute sensitivity to elevated prices, there exists a risk of inflation expectations becoming “un-anchored,” complicating efforts towards achieving price stability in the long run and amplifying the difficulties faced by economic policymakers.