CNN
–
The American economic engine has been a bit shaky lately.
Consumer trust is a crater, debt burdens are on the rise, people are more concerned about their work and are carefully pulling back their spending.
Still, the overall fundamentals behind consumer support remain solid, but the risks are rising significantly.
High inflation and high interest rates contribute to consumer vulnerability, making them more susceptible to more impacts, including the pure unpredictability of Trump administration policies (such as large tariffs expected to lead to higher prices) that are cooling spending and investment plans.
President Donald Trump will provide the latest news on his aggressive trade strategy at 4pm on Wednesday at his first Rose Garden event at the White House. Although exact details remain unknown, the president says he is calling for a readjustment of the trade agreement between the United States and its global partners.
“Consumers are seeing clouds dark due to the upcoming economy,” wrote Chris Rupkey, chief economist at FWDBONDS, last Friday after the two meticulous economic reports painted painful pictures of American consumers.
The Commerce Department reported that inflation-adjusted consumer spending rose just 0.1% in February as Americans reinforced their savings accounts, but another survey showed consumer sentiment plummeted by 12% in March.
“And while they may not always be right, if they don’t start spending again, this latest negative reading about confidence will become a reality,” Rupkey added.
Consumer expenditures more than two-thirds of the country’s economic activity. So, if the engine fades, the economic consequences can begin to spiral.
“Consumers, they need motivation and ability,” Dan North, senior economist at Allianz Trade North America, told CNN. “The motivation (consumer trust) they don’t have. The ability (income) is declining.”
Commerce Department data on Friday showed that personal income recorded solid profits for the second consecutive month, but real (inflation-adjusted) revenues rose after taxes rose just 1.8% year-on-year.
“It’s pretty weak,” North said. “It’s not zero, but it’s pretty weak.”
If both disposable income and trust are declining, he said, it is likely that a decline in core spending will continue.
But it remains unclear whether spending in January and February reflects a recession or inflationary horror, or whether they simply took a step back after buying in the months of last year’s final, Wells Fargo economist Shannon Grain said.
“The real spending has weakened, and there have been some downward revisions to the data from the previous month, but I think it’s a bit too early to amortize consumers,” Grain said.
Wages continue to outperform inflation, and overall revenue growth is strong thanks to the still-crowded labor market.
But many people ride the ongoing health and stability of the job market.
“That’s a big risk. Will this labor market data start to really start bringing consumers back spending?” she said. “However, the ultimate basis of the household sector is income, and it is still in a decent position.”
Still, Grain warns, that doesn’t apply to all households.
The ongoing theme of post-pandemic recovery was the widening divergence of American household finances. Low-income and younger consumers are struggling even more, she said, and will stand up to face tariff pressure by putting their salaries on top of their pay and standing up to face tariff pressure.
With the arrears, the debt balance is increasing.
“We see low-income and younger borrowers increasing these delinquency rates.
However, at a macro level, she added, consumer mortgage health, the biggest component of U.S. household debt, serves as a prominent offset.
“Mortgage delinquency is approaching pre-Covid levels, where we sat in historic low waters,” she said. “The fairness held in the detached housing market remains the highest ever.”
Still, she warned that the longer and the more uncertainty continues, the more likely it is for people and businesses to “act in a funky way.”
“I think the uncertainty about it will only lead to more outcomes of action than a simple implementation of tariffs,” she said. “Recent data is, ‘Are this all temporary tariff effects, and is it just people trying to act on uncertainty?” Or is this a sign of new weakness that is finally showing up in the data? ”
And while the recession is not the basic case for Grain or Wells Fargo, it could be an overall cooldown.
“I’m withstanding a slowdown in growth based on this waiting approach that’s happening for businesses, households and (the Federal Reserve),” she said. “We don’t think it’s too far, but the longer this uncertainty lasts from a growth perspective, the more we worry.”
Victor Yarbra recognizes the vast gap. He is one of three brothers behind Kentucky’s first black-owned bourbon distillery, the Brough Brothers Distillery.
The original Brough Brothers distillery is located where the brothers grew up. Louisville’s West End is part of a town that was once considered a “harem of the South” but has suffered economically, particularly in recent decades.
The times seem to be getting more difficult for some residents, Yabluff said in an interview with CNN.
“Two blocks away, there’s a church with a food drive. I’ve seen a lot more people carry a basket of food each time,” he said. “It says for a lot of people, even in areas that are economically depressed, things are getting worse.”
At the same time, the Brough Brothers are in the midst of a massive expansion that includes a second largest facility with event space across town, and plans to expand its international distribution (until recently). European Union and Canada’s retaliatory tariffs on American whiskey and bourbon disrupt those plans.
Yarbrough said his company is doing everything it can to adapt, but he is worried about how customers can navigate these times if prices for many products rise.
“We’re very competitive prices, but the reality is that if people don’t have jobs, you can’t spend,” he said. “We don’t need it. We don’t like eggs or milk.”
