Could consumer spending and sentiment be a factor in the economy’s decline?

Key Takeaways

• As President Donald Trump ramps up tariff talk, consumers are becoming more concerned about their financial futures.
• The New York Federal Reserve consumer survey revealed that in February, expectations for inflation increased as households prepared themselves for the effects of tariff policy. 
• Economists warned that a worsening mood could lead to a slowdown in economic growth due to the decline in retail sales and consumption.

Consumer spending has supported the economy's recovery from the pandemic, but worries about cost increases may erode optimism.

In February, consumers anticipated inflation would worsen over the next 12 months, projecting an increase of a tenth of a percentage point to 3.1%, according to the New York Federal Reserve's survey of consumers.

It’s just the latest sign that consumers have begun to feel worse about their economy. Various measures of consumer sentiment have declined as President Donald Trump has moved to implement tariffs—which could be a problem for the economy.

“The deterioration in confidence could very well lead businesses to pare or at least delay investments and new hires, consumers to delay purchases, and for financial risk assets, such as equities, to decline or increase in volatility," wrote Nationwide Chief Economist Kathy Bostjancic.

How can consumer sentiment affect economic growth?

Consumer spending makes up about 70% of gross domestic product (GDP), a measure of the economy’s growth. Shoppers have helped support the economy through inflation spikes and subsequent interest rate hikes, as shoppers kept up their momentum through most of 2024. 

Data indicate some consumers were already watching their wallets before Trump implemented tariffs. If consumer surveys confirm that Americans are worried about their future, they might cut back on their spending, and in turn, slow down the economy.

BMO Capital Markets Chief economist Douglas Porter wrote in a recent article that the GDP could drop to 1% during the first quarter due to tariff talk. That's significantly lower than the 2.3% in the fourth quarter of last year.

Bostjancic stated that “part of the negative impact of economic activity is due to the drop in confidence of business, consumer, and investor, as it was generally believed that tariffs were going to be used as a negotiating tool and threat, rather than being implemented.”