Executive Summary
- Despite declining consumer sentiment and trade policies initiated by President Trump, robust consumer spending, supported by low unemployment, continues to drive the U.S. economy.
- While consumer sentiment has fallen, surveys indicate it has been an unreliable predictor of purchasing behavior, suggesting the dip may not translate into significant spending cutbacks.
- Businesses have largely absorbed the impact of Trump’s tariffs on consumer prices through strategic adaptations, but rising producer prices suggest potential future consumer inflation.
The Story So Far
- Ongoing trade policies initiated by President Donald Trump are a key factor influencing consumer sentiment and business adaptation.
- A sustained low unemployment rate continues to bolster consumer spending, which is a primary driver of the U.S. economy.
- Businesses have employed various strategies to mitigate the impact of tariffs and prevent a surge in consumer inflation.
Why This Matters
- Despite declining consumer sentiment and ongoing trade policies initiated by President Donald Trump, robust consumer spending continues to be the primary driver of the U.S. economy, supported by low unemployment.
- Businesses have largely succeeded in mitigating the immediate impact of President Trump’s tariffs, preventing widespread consumer price increases through strategic adaptation and inventory management.
- A recent surge in producer prices suggests that businesses’ capacity to absorb tariff-related costs may be diminishing, potentially leading to higher consumer inflation in the future.
Who Thinks What?
- American consumers are maintaining robust spending habits, driven by low unemployment, despite rising anxiety and a decline in consumer sentiment regarding inflation and President Trump’s trade policies.
- Businesses have strategically adapted to President Trump’s tariffs by employing tactics such as delaying inventory orders and negotiating cost-sharing, which has largely mitigated inflationary pressures on consumer prices and helped maintain low unemployment.
- Economists and recent economic data suggest that while consumer inflation has remained relatively tame, the surge in the Producer Price Index indicates that businesses’ ability to absorb tariff impacts may be nearing its limit, potentially leading to higher consumer prices in the future.
Despite rising consumer anxiety regarding inflation and the ongoing trade policies initiated by President Donald Trump, American consumers continue to maintain robust spending habits. Recent economic data indicates that while consumer sentiment has declined, factors such as low unemployment and strategic maneuvers by businesses have largely mitigated the immediate impact of tariffs on consumer prices, allowing spending to remain a primary driver of the U.S. economy.
Consumer Spending Resilience
Americans are continuing to open their wallets, supported by a low unemployment rate, which currently stands at 4.2%. This sustained employment enables consumers to spend and save, contributing significantly to the U.S. economy, with consumer spending accounting for approximately 70% of the nation’s economic output.
Retail sales data for July underscored this resilience, with spending at U.S. retailers increasing by 0.5%, according to the Commerce Department. This figure followed an upwardly revised 0.9% gain in June and aligned with economists’ expectations. Growth was observed across various categories, notably at car dealerships and furniture stores, which saw sales climb by 1.6% and 1.4% respectively.
Online sales also experienced a jump of 0.8% in July, coinciding with Amazon’s Prime Day event. Spending also picked up at gas stations and department stores. However, some categories saw declines, including home improvement stores, electronics retailers, and restaurants and bars.
Even after accounting for a 0.2% monthly increase in consumer prices, as measured by the Consumer Price Index, retail sales still registered a healthy 0.3% gain last month. A key measure of underlying consumer demand, the “control group” of retail sales (excluding volatile categories), rose 0.5% in July, slightly exceeding economists’ projections.
Consumer Sentiment Decline
While spending remains strong, recent surveys indicate a degree of consumer apprehension. Consumer sentiment, as reported by the University of Michigan on Friday, fell by 5% this month to a preliminary reading of 58.6. This marks the first decline in four months, reversing a period where sentiment had improved, with consumers expressing relief that the worst of President Trump’s trade policies might be in the past.
However, the University of Michigan noted that consumer sentiment has been an unreliable predictor of purchasing behavior in recent years. This suggests that the current dip in sentiment might not necessarily translate into a significant cutback in spending.
Business Adaptation to Tariffs
Businesses have played a crucial role in maintaining economic stability despite persistent jitters surrounding President Trump’s trade policies. Companies have largely avoided ramping up layoffs to manage cost pressures stemming from tariffs, helping to keep unemployment low.
Mitigating Inflationary Pressures
A recent report from the Federal Reserve Bank of Richmond detailed various strategies businesses have employed to manage the impact of tariffs and prevent a surge in consumer inflation. These tactics include delaying inventory orders, strategically timing when tariffs are charged, and negotiating cost-sharing agreements with suppliers and customers.
Additionally, many businesses proactively stocked up on inventories earlier in the year to mitigate potential tariff-induced price increases. These collective efforts have, so far, succeeded in keeping a lid on consumer inflation, despite economists’ long-standing expectations that tariffs would likely stoke price increases.
Outlook on Inflation
While consumer inflation has remained relatively tame, there are emerging signs that this trend may not persist indefinitely. The latest Producer Price Index (PPI), which measures the prices businesses pay their suppliers, surged 0.9% in July from the prior month. This pushed the annual rate to 3.3%, with both the monthly and annual figures exceeding economists’ expectations.
This increase in input costs for businesses suggests that the strategies used to absorb tariff impacts may face increasing pressure, potentially leading to higher consumer prices in the future. The full effects of President Trump’s tariffs on the broader economy remain a subject of ongoing observation.
