Key Points

  • Data released by the U.S. Bureau of Economic Analysis (BEA) on Friday showed that consumer spending fell 0.5% month-over-month in January, dragged down mainly by a pullback in purchases of autos and other durable goods, highlighting a decline in household confidence. Tariff policies could push up inflation, posing an additional risk.
  • "Households are increasingly worried about price pressures from tariffs and employment risks from government layoffs," said Scott Helfstein, head of investment strategy at asset manager Global X, in an email. "Consumers may enter a wait-and-see mode, assessing the pros and cons of current tax and tariff policies."
  • Following the data release, the Atlanta Fed abandoned its February 19 forecast of 2.3% economic growth for the first quarter and now expects the economy to contract by 1.5% in the first quarter.

In-Depth Analysis

Two closely watched consumer confidence indicators both declined in February, mainly dragged down by concerns over import tariffs already implemented and planned by U.S. President Donald Trump.

The Conference Board said on February 25 that its Consumer Confidence Index fell for the third consecutive month, posting its largest decline since August 2021. Meanwhile, its Consumer Expectations Index dropped below the level that typically signals a recession for the first time since June.

"Views of current labor market conditions weakened," said Stephanie Guichard, senior economist for global indicators at the Conference Board, in a statement. "Consumers turned pessimistic about future business conditions, less optimistic about future income, and the pessimism about future employment prospects intensified, reaching a 10-month high," she added.

Similarly, data released by the University of Michigan on February 21 showed that its Consumer Sentiment Index fell sharply in February, mainly due to concerns that import tariffs would push up price pressures. Joanne Hsu, director of the university's survey, noted in a statement that all five components of the sentiment index declined, with the sub-index for buying conditions for durable goods plunging 19%, "largely due to concerns about imminent tariff-induced price increases."

Data released by the BEA on Friday also showed that, at least based on January figures, the outlook for the Federal Reserve's fight against inflation has not dimmed. The Fed's preferred inflation gauge—the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices—rose 0.3% month-over-month in January and 2.6% year-over-year, in line with expectations.

However, according to the Conference Board's survey, consumers do not believe Fed policymakers will bring inflation down to the 2% target anytime soon. Their inflation expectations for the next 12 months jumped from 5.2% in January to 6% in February.

"This increase likely reflects a mix of factors, including sticky inflation, recent price spikes in key household necessities like eggs, and the anticipated impact of tariffs," Guichard said. "Mentions of trade and tariffs rose sharply, returning to highs not seen since 2019. Most notably, comments about the current administration and its policies dominated respondents' feedback," she added.