Fear of Trump's trade war sends US consumer sentiment plunging

US consumer sentiment plunged in April, a seemingly sharp rebuke of President Donald Trump's trade wars that have fuelled anxiety over possible job losses and rising inflation.

US consumer sentiment plunged in April, the fourth consecutive month of declines, in a seemingly sharp rebuke of President Donald Trump's trade wars that have fuelled anxiety over possible job losses and rising inflation.

The preliminary reading of the University of Michigan's closely watched consumer sentiment index, released Friday, fell 11 per cent on a monthly basis to 50.8, the lowest since the depths of the COVID-19 pandemic. Over the past year, sentiment has tumbled 34 per cent.

The decline was pervasive and unanimous across age, income, education, geographic region, and political affiliation, said Joanne Hsu, director of the survey.

 

The share of respondents expecting unemployment to rise in the coming months increased for the fifth straight month and is now the highest since 2009 during the Great Recession.

While consumer sentiment is not always a reliable indicator of the overall economy, it has at times reflected shifting vibes in how the public feels about presidential leadership. Sentiment among Republicans has dropped 6 per cent over the past month as Trump teased, then rolled out a series of aggressive tariffs, only to institute a 90-day pause of some import taxes Wednesday.

Interestingly, President Trump appears to be getting much of the blame for much of the deterioration in sentiment with 67 per cent of respondents saying the government is doing a poor job' on fighting inflation and unemployment, said James Knightley, chief international economist at ING. Only 18 per cent say it is doing a good job.'  The result of the trade war drama so far is a baseline tariff on most countries of 10 per cent, with imports from China getting taxed at a combined 145 per cent. Goods from Canada and Mexico face tariffs of up to 25 per cent, while imported autos, steel and aluminum are taxed at that same rate. China retaliated Wednesday with a 125 per cent tariff on US goods.

The Trump administration has suggested that it cut new trade agreements with more than 75 nations over a span of 90 days.

Eroding American confidence has also surfaced in the financial markets. Investors are selling off US debt. The interest rate on the 10-year US Treasury note rose to reach 4.57 per cent in Friday morning trading, up from roughly 4 per cent at the start of the week.

On Friday, the dollar slumped to a three-year low against the euro.

Americans' inflation expectations over the next five years are now at the highest since 1991, according to Capital Economics, a forecasting firm.

Households appear to have come to the same conclusion as markets: the tariffs will do lasting damage to the US economy, Harry Chambers, assistant economist at Capital Economics, said in an email.

Consumer sentiment remains sharply divided by party, with the index for Democrats at 34.1 and Republicans at 81.9. Yet both recorded steep drops in April.

Sentiment among independents plunged to 46.8 from 55.7, and is sharply below its post-election peak of 70.2. The April reading among independents is now lower than it was at any point during Joe Biden's presidency.

Those inflation expectations have now jumped for several months. At a news conference last month, Fed Chair Jerome Powell said the University of Michigan's inflation expectations measure was an outlier. Market-based measures of inflation expectations, based on inflation-adjusted Treasury securities, have remained low, near the Fed's 2 per cent target.

Typically, falling sentiment suggests that Americans will cut back on spending, though in recent years consumers have at times kept spending despite the gloom. Yet the fact that worries about employment are rising could lead to more caution by consumers.

This lack of labor market confidence lies in sharp contrast to the past several years, when robust spending was supported primarily by strong labor markets and incomes, Hsu said.