Let’s start with the good news, consumer sentiment which increased for the second consecutive month. This move comes on the heels of reversal that had pushed sentiment to one of its lowest levels since the start of the current inflationary storm three years ago. This welcomed development comes against the backdrop of shifting economic signals. Recent tariff announcements and the rise and fall of inflation expectations add to a complicated backdrop.
After a brutal six-month stretch of gloomier consumer perceptions, sentiment started to move in an upward direction with July’s report. It’s still 16% below where it stood in December, right before Donald Trump was inaugurated. With consumer spending accounting for about 70 percent of U.S. economic activity, these changes in outlook could have a serious impact on the economy. The big jump last month indicates a more positive outlook among consumers that could help sustain overall economic growth in the months ahead.
Alongside an uptick in consumer sentiment overall, consumers’ year-ahead inflation expectations have dropped for the second straight month. These expectations were reduced from 5.0% in June to 4.4% this month. Consumers can take comfort from this drop as they move through the complex and unpredictable economic environment. Yet, analysts are concerned that inflationary increases might accelerate in the months ahead due to upcoming tariffs.
So far, the U.S. economy has enjoyed a short-term victory and largely avoided fears of an economic downturn due to tariff implementations. Even with some of these anticipated bumps in the road, the unemployment rate remains near its all-time lows. Job growth remains robust, though not at the previous record paces. The case for economic resilience is evident. Still, the public remains wary and for good reason of the new tariffs set to go into effect this August.
Donald Trump has done something very bold. He’s announced plans to impose tariffs as high as 50% on numerous countries. Of all of these proposals, he’s out to attack copper imports in particular. As a result, he’s rolled back many of his formerly draconian tariffs over the past few months. The imposition of new levies would weigh on prices, denting consumer sentiment and spending.
Combined with rising energy prices and supply chain disruptions, these tariffs would further increase inflationary pressure. They would still be a major increase from the current year-over-year inflation rate of 2.7%. The economic development world is changing almost as rapidly as the world around us. Consumers and analysts will be watching these adjustments as a barometer of future spending and general economic activity.
