In Washington, economic concerns are mounting as consumers face uncertainty due to threats of increased tariffs and potential government job cuts. This unsettling news comes amidst a mostly stable economy, with data released on Friday showing a notable dip in consumer spending, the largest reduction since early 2021, despite an increase in personal incomes.
Amidst this backdrop, inflation rates marginally cooled. However, the potential imposition of heavy import taxes on Canada, Mexico, and China by the U.S. government may soon hike prices. Some businesses are already planning price increases in anticipation. In January, consumer spending fell by 0.2% compared to the previous month, possibly influenced by cold weather, but it also points to broader economic caution.
Stephen Stanley, chief U.S. economist at Santander, noted that the fluctuating news from Washington is likely causing hesitation among businesses and impacting consumer behavior. This drop in spending, alongside a surge in imports as companies attempted to preempt tariff impacts, has led analysts to predict significant economic slowing. The Federal Reserve’s Atlanta branch anticipates a 1.5% economic contraction at an annual rate for the first quarter following a 2.3% growth in the previous quarter.
Although most economists predict some economic growth in this quarter, expectations have been adjusted downward. Inflation fell to 2.5% in January year-over-year, down slightly from December’s 2.6%, with core prices dipping to their lowest since June. Despite cooler inflation, President Trump’s proposed tariffs – including a 25% increase on Canadian and Mexican imports, alongside a doubling of the import tariff from China – may halt this progress.
Moreover, Trump’s push for federal worker layoffs could slash hundreds of thousands of jobs, potentially increasing unemployment. Randy Carr, CEO of World Emblem, voiced concerns that these tariffs would necessitate job cuts and price hikes. With factories in both Georgia and California but 60% of production based in Mexico, Carr anticipates raising prices by 5 to 10% and canceling significant investments if tariffs are enacted.
The Federal Reserve announced holding its key short-term interest rate steady at 4.3% in January. This aims to curb borrowing and spending to moderate inflation toward their 2% goal, impacting interest costs for mortgages, auto, and credit cards. Although inflation has eased from last year’s peak, the specter of tariffs threatens further progress.
While Americans’ incomes rose sharply by 0.9% in January, mainly due to a cost-of-living adjustment for Social Security, spending still dropped, particularly on automobiles. This reflects a potential post-holiday frugality, compounded by skyrocketing credit card debt in December.
Concerns loom over whether tariffs might spike inflation or stifle the economy—or both, a perilous scenario. Jeffrey Schmid, president of the Fed’s Kansas City branch, expressed caution about inflation due to rising price expectations among Americans, though he noted that business uncertainty could dampen growth prospects.
Many in the toy industry were initially relieved when proposed tariffs on Chinese imports were reduced to 10%, considering it manageable to offset some costs with retailers. However, a 20% hike would likely compel retailers to increase prices significantly. Curtis McGill from small toy firm Hey Buddy Hey Pal labeled the tariff situation as a “nightmare,” highlighting challenges in maintaining pricing structures amid such shifts.
Amidst these economic headwinds, Walmart, America’s largest retailer, cited uncertainties around consumer health and projected weaker sales growth for the year, causing a share price dip. These tariff concerns are negatively impacting consumer confidence, undoing some stability achieved post-election.
