The economic mood in America is deteriorating, with consumers increasingly expecting higher inflation and a potential recession. According to the Conference Board's latest survey, consumer confidence slid 7.2 points this month to a reading of 92.9, reaching its lowest level since January 2021. This decline extends a trend that began in December following the US presidential election. The weakening sentiment is compounded by expectations of higher inflation and a possible economic downturn, a toxic combination reminiscent of "stagflation." Federal Reserve officials are also noting this trend, with expectations for future economic conditions at a 12-year low.

The Impact of Trump's Trade Policies

President Donald Trump's fluctuating trade policies have been a significant source of uncertainty. His administration's approach to tariffs has been both baffling and contentious. Earlier this month, Trump imposed 25% tariffs on imports from Mexico and Canada, only to delay them for another month after complaints from business leaders. Additionally, following the European Union's retaliation to US metal tariffs, Trump threatened a 200% tariff on European alcohol. These actions have created a volatile environment, making it difficult for consumers, businesses, and investors to plan ahead.

The uncertainty is further exacerbated by upcoming tariffs aimed at matching those imposed by foreign countries—so-called reciprocal tariffs slated for April 2. While these tariffs might be watered down, the back-and-forth nature of Trump's trade policies has already evoked high levels of uncertainty. This volatility is stoking fears that the economy could be heading toward stagflation, a scenario characterized by stagnant economic growth and rising inflation.

Consumer Confidence and Economic Indicators

The Conference Board survey revealed that Americans' expectations for income, business, and labor market conditions in the coming year fell sharply this month, declining 9.6 points to 65.2, the lowest level in 12 years. Meanwhile, the share of respondents expecting a recession in the next 12 months held steady in March at a nine-month high. This growing pessimism among US consumers is a cause for concern, as consumer confidence is a key indicator of economic health.

Stephen Miran, chair of Trump’s Council of Economic Advisers, downplayed the drop in consumer confidence, suggesting that political views often influence economic perceptions. He argued that hard data, such as jobs reports, provide a more accurate picture of the economy. However, Sarah House, senior economist at Wells Fargo, cautioned that while soft data like consumer confidence surveys have shown some wobbles, it remains to be seen whether these will manifest in hard data, such as economic growth and the labor market.

The Federal Reserve's Wait-and-See Approach

The Trump administration's rapid-fire policy changes have also perplexed the Federal Reserve, which is tasked with managing borrowing costs. In addition to tariffs, the administration is also carrying out mass deportations and slashing regulations. Central bankers have recently adopted a wait-and-see approach with interest rates, holding them steady as they monitor the economy's response to Trump's policies.

Fed Governor Adriana Kugler emphasized this approach, stating, "The (Fed) can react to new developments by holding at the current rate for some time as we closely monitor incoming data and the cumulative effects of new policies." Most Fed officials, including Chair Jerome Powell, have said that what matters is the "net effect" of Trump’s policies on growth, hiring, and inflation, which are currently minimal.

Signs of Economic Weakness and Strength

Despite the uncertainty, there have been some signs of economic weakness. A real-time forecast of economic growth by the Atlanta Fed shows the economy contracting in the current quarter, slowing sharply from late last year. This is largely due to unusually harsh cold weather in January, which affected consumer spending and industrial activity. However, America’s labor market remains a sturdy pillar of strength, with unemployment at a low 4.1% and employers adding a solid 151,000 jobs in February.

The Fed is also concerned about the recent increase in Americans’ expectations for inflation in the short and long term. After the Fed’s latest monetary policy meeting, Powell noted that long-run inflation expectations remain "mostly well anchored." However, Atlanta Fed President Raphael Bostic suggested that rate cuts might be necessary due to the bumpy nature of inflation and its slow movement toward the 2% target.

Navigating Uncertainty

The current economic landscape under President Trump is marked by uncertainty and growing concerns about stagflation. While consumer confidence has declined and expectations for future economic conditions are at a 12-year low, the labor market remains strong, providing some stability. The Federal Reserve's wait-and-see approach reflects the need for clarity on how the economy will respond to Trump's policies.

As the administration continues to navigate its economic agenda, the key will be balancing protectionist measures with the need to maintain economic stability. The upcoming reciprocal tariffs and their potential impact on global trade will be a critical test of this balance. While Trump's trade policies aim to protect US industries, the uncertainty they create poses a significant challenge for consumers, businesses, and investors. The ability to manage this uncertainty and mitigate its economic impacts will be crucial in determining the success of Trump's economic strategy.