Recent headlines appear to have shaken investor sentiment. It’s premature to read too much into a few days of weaker-than-expected survey numbers. More importantly, the latest data indicate that the economy is still growing, businesses continue to hire, and the near-term outlook for consumer spending remains positive. But the White House would do well to consider the implications of the recent slide in Main Street’s sentiment. The financial markets seem to be doing just that.
Consumer Confidence Takes a Hit
Two measures of the mood among consumers in February, published in recent days, are a good place to start. The University of Michigan’s Consumer Sentiment fell sharply this month, “in large part due to fears that tariff-induced price increases are imminent,” wrote surveys of consumers director Joanne Hsu on Friday.
Yesterday’s release of the Conference Board’s Consumer Confidence Index for February tells a similar story.
“In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, a senior economist at the consultancy. “This is the third consecutive month-on-month decline, bringing the Index to the bottom of the range that has prevailed since 2022.”
Signs of weaker sentiment may be starting to resonate in the small business sector too. NFIB’s survey of business owners fell in January, although it remains elevated following President Trump’s election in November. But the survey’s Uncertainty Index rose sharply last month to its third-highest readings following two straight months of decline.
Sentiment data should be viewed cautiously, but the recent updates probably capture a higher level of anxiety this month. A relevant factor may be the dramatic changes on multiple fronts announced by the White House over the last several weeks, including plans for sharp increase in tariffs, which are expected to lift prices and juice inflation, if only temporarily. Regardless of what you think of the president’s agenda, the rapid transformation of longstanding norms is shaking confidence in markets and the consumer sector.
Political Divides in Consumer Sentiment
To be fair, there’s still a sharp difference in consumer sentiment data when you separate Republicans from Democrats. Not surprisingly, the optimism that Democrats expressed before the election has dropped sharply while some measures of GOP-aligned consumers have rebounded. Politics, in short, continues to muddy the waters for developing a clear read on the country’s overall outlook.
Financial markets, by comparison, are apolitical and recent shifts in the directional bias for stocks and bonds are getting harder to ignore. The stock market (S&P 500 Index) fell for a fourth straight day on Tuesday. To be fair, the S&P is still close to a record high and so it’s premature to read too much into a few days of what, so far, amounts to a “normal” correction.
Meanwhile, the sharp slide in US Treasury yields, on its face, might be greeted as a positive development. Perhaps, but much depends on whether this trend persists, and why. At the moment, falling bond yields and falling stock prices suggest a risk-off scenario may be brewing.
Some analysts are starting to worry that the president’s aggressive plans for tariffs are beginning weigh on consumers’ expectations, which in turn has implications for the economic outlook.
“The economy is about to have the rug pulled out from under it as Washington policies are causing a rapid loss of confidence on the part of consumers,” predicts Chris Rupkey, chief economist at FWDBonds. “The economy is coming in for crash landing this year. Bet on it. The bond market is.”
That strikes me as overly pessimistic, at least for now, but it’s a reminder that the White House needs to be more sensitive to how its hardline approach for change is being perceived. As Greg Ip at The Wall Street Journal opines today: Sliding consumer sentiment of late “might be spilling over to perceptions of President Trump. More respondents to recent polls for both Gallup Gallup and Quinnipiac University disapproved than approved of his handling of the economy.”
Federal Budget and Rising Debt Concerns
An added complication is yesterday’s House approval of a budget proposal that clears the path for implementing President Trump’s legislative agenda. By some accounts, the plan appears set to create a deeper shade of red for the government’s already steep budget deficit. A balanced budget, which President Trump has recently advocated, looks more elusive, based on the House’s plan.
One Republican (Rep. Thomas Massie from Kentucky) warns:
“If the Republican budget passes, the deficit gets worse, not better.”
The Committee for a Responsible Federal Budget advises that if the proposed budget passes, it would add $3.4 trillion to an already hefty level of debt over the next 10 years and the pace of growth in federal government liabilities would accelerate.
That’s a worrisome sign at a time of increasing anxiety about the deepening level of federal government debt in relative and absolute terms. As I wrote yesterday for TMC Research, the rise in the price of gold recently appears to be a warning sign for the US fiscal risk outlook.
The good news is that the Trump administration still has time to shore up confidence on Main Street and for markets. The bull-in-a-china shop approach isn’t working, and so a more nuanced, thoughtful strategy is advisable. The economy is still fundamentally in good shape, and so this is still President Trump’s game to lose. Meanwhile, the clock is ticking.