The Tariff News on Wednesday is awaited by Consumers and Businesses alike

Key Takeaways

• Uncertainty around tariff policy has stressed the economy and financial markets, leaving consumers and business leaders nervous ahead of this week's tariff announcements. 
• If tariffs push up prices, consumers could significantly slow spending, damaging the economy's health and raising the possibility of a recession.
• Tariff talk has also spurred mentions of "stagflation," which is hard for the Federal Reserve to defend against. Fed Chair Jerome Powell said he isn't concerned about that possibility at this time.

Just two weeks ago it seemed unlikely that a recession would be imminent.

The signs are now more clear that consumers in the United States are spending less because they are anxious. This is causing economists to worry about a possible economic downturn.

Wednesday's news on tariffs could be critical for consumers and companies. The White House is dubbing President's Donald Trump's announcement of global tariffs “Liberation Day,” as it aims to supercharge U.S. manufacturing by punishing countries that have steep tariffs on U.S. goods. The administration has acknowledged that there may be short-term pain in the economy, and both Wall Street as well as Main Street are worried.

Bob Schwartz is a senior economist at Oxford Economics. In a note sent to clients, he wrote: “Most indicators still depict an economy that’s running comfortably above the recessionary waters.” “But the sinking feeling is becoming more tangible, and downward revisions of growth forecasts are spreading.”

Stock markets remain volatile. The S&P 500 is down more than 4% this year, while the tech-heavy Nasdaq has fallen nearly 10%. The big U.S. firms have given more cautious earnings guidance for the first quarter than usual. CEOs are less optimistic and manufacturing activity dropped in March due to tariffs.

The consumers are also nervous. A University of Michigan March survey found that consumers’ expectations of the unemployment rate in the coming year were at their highest level in 2009, right after the financial crisis.

Worry No. Worry No.

A skittish U.S. Consumer doesn’t mean trouble. Consumer spending can keep the economy afloat, as long they don’t pull out their wallets. 

Jonathan Millar is a senior economist with the British bank Barclays. He says that recent data indicates a “meaningful slowdown in activity” has begun to emerge. He cited the weaker-than expected consumer spending figures for February, including a 0.1% decrease in services expenditures compared with January. 

He wrote that the decline was not large, but could be concerning because services “anchored household spending throughout this expansion.” After the COVID boom in spending on goods and appliances died down, consumers began to spend more on services, such as concerts, hotels, restaurants and hotels.

The February data was also disappointing, given the expectations of a strong recovery from January when the cold weather dampened spending. Schwartz, from Oxford Economics, wrote that slower spending will drag GDP down this quarter and could bring it to negative territory if there is no “exceptional jump in March”. 

Schwartz wrote that “one quarter does not make for a recession and there are many reasons to believe a spring recovery is on the cards.” But consumers’ gloominess, he added, may “become a self-fulfilling prophecy."

Worry No. 2: Stagflation Would Complicate the Federal Reserve's Job

Jerome Powell of the Fed, who is scheduled to speak on Friday, has said that the economy is “solid,” even though he has flagged rising uncertainty. Powell said last month that private-sector forecasters had increased their odds of a recession, but they remain “relatively modest” and have risen from “extremely small” levels.

He also reacted to recent talk about “stagflation,” a combination of economic stagnation and an upward spiral of prices. 

In the 1970s the Fed was faced with this scenario, partly because of the high oil prices. Former Fed Chair Paul Volcker slowed down the economy to bring inflation under control by raising interest rates above 20%. The Fed’s actions stopped the spiraling price.

The U.S. is not “in a situation that's remotely comparable to that,” Powell told reporters last month. He said the Fed’s 2% inflation target is more achievable, even though the unemployment rate is 4.1%. “I don't see any reason to think that we're looking at a replay of the '70s,” Powell said.

But the risk is rising that a weaker economic climate will lead to higher prices for goods subject to tariffs. Scott Anderson, chief U.S. economics at BMO Capital Markets wrote that car prices could increase by thousands of dollars when tariffs on imported cars kick in.

“Stagflationary risk continues to build as protectionist policies collide with a U.S. Consumer who is currently having second-thoughts about its financial and economical future,” Anderson wrote.