U.S. consumer sentiment took a dramatic hit in March, reaching its lowest point in nearly two and a half years. According to Reuters, the decline was largely attributed to growing concerns over the economic consequences of President Donald Trump’s tariffs.
These tariffs have sparked widespread fears of rising inflation, economic instability, and a potential slowdown. As a result, these concerns have led to a significant increase in long-term inflation expectations, leaving consumers feeling increasingly uncertain about the future.
Consumer Sentiment Hits Its Lowest Level Since November 2022
The University of Michigan’s Consumer Sentiment Index dropped to 57.9 in March, down from 64.7 in February. This marks the lowest level since November 2022 and has erased all the gains made following Trump’s election victory.
This sharp decline reflects the growing pessimism about the future economic outlook, with consumers expressing concerns about personal finances, inflation, employment, and the stock market.
Tariffs and Inflation Expectations Surge
The tariffs imposed by the Trump administration on goods from major trading partners, including China, Canada, and the European Union, have caused significant volatility in consumer expectations.
Nearly half of the survey’s respondents cited tariffs as a key factor that could drive up prices in the future. As a result, 12-month inflation expectations rose to 4.9%, the highest since November 2022, and five-year expectations climbed to 3.9%, the highest level since 1993.
This shift is a marked change from the pandemic era, when consumers largely saw price spikes as short-lived.
“Unlike during the pandemic when consumers largely understood the price spikes to be short-lived, it is increasingly evident in the data that consumers see the price pressure today as longer lasting,” said Tim Quinlan, senior economist at Wells Fargo.
Political Divisions in Economic Outlook
The deterioration in consumer sentiment has been felt across all political affiliations. Among Republicans, expectations dropped by 10%, while Independents saw a 12% decline, and Democrats experienced a significant 24% decrease.
Despite these differences, there is a shared concern about the economic uncertainty created by the ongoing trade war and the potential for prolonged price pressures.
“Consumers from all three political affiliations are in agreement that the outlook has weakened since February,” said Surveys of Consumers Director Joanne Hsu.
The Role of Tariffs in the Broader Economic Outlook
The uncertainty surrounding the tariffs, including recent threats of additional duties on European imports, has further rattled financial markets. The escalating trade tensions are seen as a potential risk to the ongoing economic expansion.
The financial market’s reactions, such as the stock market selloff, have contributed to the decline in consumer confidence, with many fearing that the trade war will lead to higher prices and reduced economic growth. Christopher Rupkey, chief economist at FWDBONDS, remarked:
“The jury is back and the verdict is in. Trump 2.0 policies are harming the economy and the future prosperity of America. The consumer is frightened and sees sharply higher prices ahead despite the assurances from Washington that trade tariffs are good for the economy.”
Economists have noted that the rise in inflation expectations could present challenges for the Federal Reserve as it assesses the broader economic landscape.
While the central bank has previously argued that tariffs may have only a short-term impact on prices, there is growing skepticism that this view remains valid given the persistent rise in inflation expectations.
“Fed officials have argued that as long as inflation expectations remain anchored, tariffs can probably be viewed as having a one-off impact on prices rather than being part of an inflation process, said Conrad DeQuadros, senior economic advisor at Brean Capital.”
The Threat to Consumer Spending
The pullback in consumer confidence is becoming a real threat to consumer spending, as economists warn that people who fear the economy is heading for trouble may hold off on making purchases.
“The pullback in confidence is becoming a real threat to consumer spending,” said Bill Adams chief economist at Comerica Bank.
This uncertainty in consumer behaviour could have broader implications for economic growth, with reduced spending potentially exacerbating the economic slowdown.
