#MacroFriday: Consumer confidence, Inflation and Tarrifs

U.S. consumer confidence saw its sharpest decline since 2021, driven by concerns over proposed tariffs and rising inflation expectations

In February, the Conference Board’s Consumer Confidence Index recorded its sharpest monthly decline since August 2021. The optimism sparked by Trump’s election has now fully faded, leaving consumers less confident than they were before the presidential elections in November. This decline in confidence aligns with January’s weak retail sales, although factors like cold weather and January’s wildfires may have played a role. Nonetheless, survey results indicate that consumer expectations for the near future have deteriorated significantly.

Uncertainty over the economic and inflationary impact of proposed tariffs has dampened consumer sentiment. Consumers are increasingly pessimistic about both their current and future financial situations. While inflation expectations have generally been elevated, their inflation outlook for the next 12 months jumped to 6% in February, up from 5.2% in January. Additionally, 26.7% of respondents now expect business conditions to worsen over the next six months, compared to 19.6% in the previous month.

 

However, caution is warranted when interpreting survey-based data, as the gap between sentiment indicators and actual economic data has been substantial in recent years. While credit card and loan delinquencies are rising, they are up from historically low levels. Meanwhile, households have significantly deleveraged, with debt service payments as a percentage of income still below pre-COVID levels. Moreover, the top 10% of earners are key to watch as they account for nearly 50% of consumer spending. The importance of household spending power was reaffirmed in yesterday’s GDP release, which showed that personal consumption accounted for 68% of GDP growth in 2024, underscoring its critical role in sustaining U.S. economic strength.