2025 Tariff Updates: How Rising Costs Could Impact Consumer Spending and the Economy

Essential Insights

• Ongoing tariff uncertainties are creating tension in financial markets and the broader economy, leaving both consumers and business leaders apprehensive ahead of this week's critical updates.
• Price increases driven by tariffs may cause consumers to curb spending considerably, threatening economic growth and increasing the likelihood of a recession.
• Discussions around "stagflation" have intensified, posing challenges for the Federal Reserve; however, Fed Chair Jerome Powell currently downplays this risk.

Just a fortnight ago, the prospect of a recession appeared remote. However, emerging data reveals that cautious U.S. consumers are reducing their expenditures, heightening economists' concerns about a potential economic downturn.

The upcoming tariff announcement on Wednesday is pivotal for both consumers and businesses. The White House refers to President Donald Trump's global tariff strategy as "Liberation Day," aiming to bolster U.S. manufacturing by penalizing countries imposing high tariffs on American goods. While short-term economic strain is acknowledged, both Wall Street and Main Street remain on edge.

Bob Schwartz, senior economist at Oxford Economics, notes, "Although most indicators suggest the economy is comfortably above recession levels, a growing sense of unease is evident, with downward revisions to growth forecasts becoming more common."

Stock markets continue to experience volatility, with the S&P 500 down over 4% and the Nasdaq nearly 10% lower this year. Major U.S. corporations have issued more cautious earnings forecasts for the first quarter than usual. CEO optimism has waned, and manufacturing activity declined in March amid tariff concerns.

Consumer confidence has also taken a hit. A University of Michigan survey in March showed a 12% drop in sentiment, with unemployment expectations reaching their highest since 2009, shortly after the financial crisis.

Primary Concern: Slowing Consumer Spending and Recession Risks

While a hesitant U.S. consumer does not automatically signal trouble, sustained spending is crucial to keeping the economy afloat.

Recent figures indicate a notable slowdown in consumer activity. Jonathan Millar, senior economist at Barclays, highlights February's weaker-than-expected consumer spending, including a 0.1% decline in services spending compared to January.

This drop is significant because services have been a key driver of household spending throughout the economic expansion. After the surge in goods purchases during the COVID-19 pandemic, consumers shifted their focus to services such as dining, travel, and entertainment.

February's disappointing data was unexpected, especially following January's weather-related spending dip. Continued spending declines could weigh on GDP growth this quarter, potentially pushing it near negative territory unless there is a strong rebound in March, according to Schwartz.

"A single quarter doesn't define a recession," Schwartz emphasizes, "but growing consumer pessimism could become a self-fulfilling prophecy."

Secondary Concern: Stagflation Challenges for the Federal Reserve

Federal Reserve Chair Jerome Powell, scheduled to speak on Friday, describes the economy as "solid," despite increasing uncertainties. While private-sector forecasts have raised recession probabilities, Powell notes these remain moderate compared to previous levels.

Powell has also dismissed recent stagflation fears—a combination of stagnant growth and rising prices.

The Fed confronted stagflation in the 1970s, largely due to soaring oil prices. Former Chair Paul Volcker responded by sharply increasing interest rates above 20%, inducing a recession with unemployment peaking near 11%, but successfully curbing inflation.

Powell asserts the current situation is not comparable, with inflation near the 2% target and unemployment at 4.1%. "There’s no indication we’re headed for a 1970s-style scenario," he stated.

However, risks persist as tariff-related price hikes, such as increased costs on imported automobiles, could exacerbate inflationary pressures. Scott Anderson, chief U.S. economist at BMO Capital Markets, warns that tariffs may add thousands of dollars to car prices.

"Protectionist trade policies combined with cautious consumer sentiment heighten stagflation risks," Anderson explains.

For ongoing updates and expert analysis on how tariffs may affect your finances and the economy, stay tuned to our coverage.

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