Forget Tariffs: Gloomy U.S. Consumers Are The Risk to Watch

Whatever happens with the trade war, the U.S. economy is in trouble if consumers retreat

• Treasury bonds rise as markets move to lock in two Fed rate cuts for 2025
• U.S. retail sales, PPI, and jobless claims data hint at economic headwinds
• Stocks may struggle if U.S. consumer confidence data points to weakness

A slew of U.S. economic data releases lit a fire in the Treasury bond market as stocks maintained an uneasy hover near weekly highs. Across three reports, the numbers painted a worrying picture of U.S. consumption trends, and thereby of the economic growth trajectory. A timely check of consumer sentiment now looms ahead.

Rates fell across the yield curve even as Federal Reserve Chair Jerome Powell hinted that the U.S. central bank’s new policy framework might jettison the concept of average inflation targeting, implying less tolerance for deviations from the 2% objective. Fed funds futures moved to cement expectations for two 25-basis-point (bps) cuts this year.

A worrying view of U.S. consumers emerges in retail sales and PPI data

U.S. retail sales data showed a rise of just 0.1% in April, a modest overshoot of expectations calling for a flat result. Nevertheless, this marks a stark slowdown from an upwardly revised 1.7% surge in the prior month. Tellingly, the kind of tariff front-running that powered that result did not carry over even as trade war worries sharpened.

Separately, producer price index (PPI) figures showed an unexpected drop in wholesale inflation. Prices fell 0.5% in April from the prior month, marking the first negative reading since October 2023 and the largest drawdown since the shock 1.2% plunge in April 2020 amid the COVID-19 outbreak.

A sharp drop of 0.7% in services costs was behind the PPI miss. In turn, that came thanks to a 1.6% decrease in margins on trade services. That component mainly reflects the price of running products through the supply chain. Contraction here suggests that businesses are absorbing higher input costs amid tariff hikes rather than pass them on.

U.S. jobless claims data warns labor market stress is building

Finally, jobless claims data showed deeper cracks appearing in the labor market. Weekly changes initial and continuing claims were relatively modest and broadly in line with economists’ expectations. However, the four-week average tracking broader trends rose to the highest in nearly seven months.

Taken together, this seems to say that consumers were unwilling chase tariff deadlines even after the White House shook up policy with “Liberation Day” reciprocal duties, then offered up a 90-day pause to front-load purchases. Their stance may have been more defensive still were the impact of tariffs not blunted as businesses ate the balance.

Signs of weakness in the jobs market make sense against this backdrop: companies losing margins to insulate consumers from higher prices are unlikely to be enthusiastic about hiring. This then adds to pressure on consumption, which further presses firms to resist passing on higher input costs lest that destroys fragile demand.

Are the markets ready to worry about recession again?

A closely watched survey of consumer confidence from the University of Michigan (UofM) will now shed some initial light on how these worrying trends continued to evolve in May. It is expected to show that sentiment continued to hover near the three-year low set in April, where it fell as one-year inflation expectations jumped to a lofty 6.5%.

Household consumption accounts for a commanding 68.5% of U.S. economic growth. First-quarter gross domestic product (GDP) data revealed the weakest contribution from this engine in nearly two years. Signs of deepening retrenchment may into the second quarter might weigh on stocks as recession worries re-emerge.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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