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America’s nearly five-year economic boom is starting to show its age.
Cracks are forming in the economy’s foundation: Layoffs are mounting, hiring is slowing, consumer confidence is eroding and inflation is picking up speed. Although all of those things would almost certainly be happening if former Vice President Kamala Harris had won the election, the uncertainty that President Donald Trump’s economic policy has unleashed is exacerbating those problems.
Tariffs — particularly the on-again, off-again nature of Trump’s dictates — are sowing confusion for businesses, consumers and investors alike, and they’re stoking concerns about inflation at a time when consumer prices have been stubbornly on the rise again.
Trump’s immigration crackdown threatens key industries, including agriculture, construction and health care, which have been struggling to hire. And steep cuts to federal workers and government aid could hurt the most vulnerable Americans who are least insulated from price hikes.
“Federal government job losses could be larger than expected, and laid-off workers could pull back on their spending, leading to slower job growth in other industries,” said Gus Faucher, chief economist at PNC, in a note to investors Friday. “Uncertainty about the outlook for tariffs could lead businesses to slow their hiring. And restrictions on immigration could limit the supply of labor available, weighing on employment gains over the next few years.”
More than ‘a little disturbance’
Trump’s policy poses real risks for the strong, yet wobbling, economy he inherited.
Trump himself acknowledged in his joint address to Congress last week and in the Oval Office Friday that tariffs will cause “a little disturbance.” And he has delayed the bulk of his most severe tariff threats after discussions with business leaders who decried the tariffs as unfairly destructive to their bottom lines and the broader economy.
Stocks have also reacted negatively to tariffs in particular, with the Nasdaq hovering around correction territory Thursday and the broader S&P 500 down about 3% since Trump took office. Stocks are not the same as the economy — but Trump and many consumers often tout the market is if it were an indicator of strength. While he’s been noticeably quiet about stocks lately, during his first term Trump routinely tweeted about markets records as a sign of America’s economic prowess.
But economic data lately has shown more than just a little disturbance.
Consumer spending unexpectedly fell in January, according to the Commerce Department. Shoppers pulled back far more than economists expected: Spending fell 0.2% for the month. Adjusted for inflation, it sank 0.5%. Those are the biggest monthly declines since February 2021.
Prices are on the rebound, rising 0.5% from December — the fastest pace since August 2023 — resulting in an annual inflation rate of 3% for the 12 months that ended in January, according to the latest Consumer Price Index data released by the Bureau of Labor Statistics. The next report comes this Wednesday.
Consumer confidence in February registered its biggest monthly decline since August 2021 and fell the most to start a year since 2009, according to the Conference Board’s Consumer Confidence Index. A separate consumer sentiment survey from the University of Michigan for February fell by the most since records began in 1978.
Meanwhile employers laid off more workers in any February since the Great Recession and the most in any month since the pandemic, according to outplacement firm Challenger, Gray and Christmas. Federal workers are getting laid off, potentially disrupting local economies — there were 10,000 fewer federal workers last month than in January, according to the latest jobs report issued by the BLS.
A Federal Reserve forecast of gross domestic product predicts the US economy may be in contraction this quarter — and not by a little. The model, which bases its prediction on economic data, shows US GDP may decline at an annualized adjusted rate of a little less than 3% this quarter. The US economy hasn’t had a single quarter of economic contraction since 2022.
Consumers aren’t spending as much as they used to, as concerns about the economy weigh on their purchasing decisions. Both Target and Walmart said in their most recent earnings reports that tariffs and inflation are leading people to spend less.
Reasons for optimism
To be sure, America’s economy remains strong and resilient.
It’s diverse and remains the envy of the world — particularly at a time when industrial powers like Germany are seriously struggling and other economies are coping with significantly higher and much stickier inflation than America is. Concerns about a recession are overdone.
Many of Trump’s policies could benefit the economy. Businesses have been clamoring for deregulation and tax cuts, and Trump’s campaign promises for no taxes on tips or overtime proved quite popular with voters. Cutting wasteful spending has also gained significant favor with a broad swath of Americans, even if the methods that Elon Musk’s DOGE employs are controversial, at best.
But Corporate America likes nothing more than certainty, which is hard to find these days. Consumers like to feel confident that if they spend their dollars, there will be more coming in subsequent paychecks to replace them — and that their future bucks will stretch as far as ones currently in their wallets.
That’s hard when tariffs, immigration and mass job cuts are in the air. Last week, the Federal Reserve’s release of its so-called Beige Book, which surveys business leaders, mentioned tariffs 49 times as Corporate America began to seriously fret about higher import taxes. More companies — 259 — in the S&P 500 mentioned tariffs on earnings calls than at any point over the past decade, according to FactSet.
The good news is America’s top economist, Federal Reserve Chair Jerome Powell, is not fretting just yet. He noted that uncertainty is on the rise, for sure, but that doesn’t necessarily mean that consumer spending, which drives two-thirds of America’s economy, will simply dry up. Despite historically low consumer sentiment in 2022, when inflation hit a 40-year high, consumers still spent — an economic oddity that became known as the “vibecession.”
“Despite elevated levels of uncertainty, the US economy continues to be in a good place,” Powell said at an event hosted by the University of Chicago on Friday. “Sentiment readings have not been a good predictor of consumption growth in recent years.”
