Tariff threats and uncertainty could weigh on consumers

Ongoing tariff threats from Washington and potentially sweeping government job cuts have darkened consumers’ mood and may be weighing on an otherwise mostly healthy economy.

Data released Friday showed that consumers slashed their spending by the most since February 2021, even as their incomes rose. On a positive note, inflation cooled, but President Donald Trump’s threats to impose large import taxes on Canada, Mexico, and China − the United States’ top trading partners − will likely push prices higher, economists say. Some companies are already planning to raise prices in response.

Americans cut their spending by 0.2% in January from the previous month, the Commerce Department said Friday, likely in part because of unseasonably cold weather. Yet the retreat may be hinting at more caution by consumers amid rising economic uncertainty.

“The roller coaster of news headlines emanating from Washington D.C. is likely going to push businesses to the sidelines for a time and even appears to be impacting consumers,” said Stephen Stanley, chief US economist at Santander, in an email.

The reduction in consumer spending - coupled with a surge of imports in January, also reported Friday, as companies likely sought to front-run tariffs - led the Federal Reserve’s Atlanta branch to project that the economy would shrink 1.5% at an annual rate in the January-March quarter, a sharp slowdown from the 2.3% growth in the final three months of last year.

Most analysts still expect the economy to expand in the first quarter, but at a much slower pace. Stanley lowered his estimate for first-quarter growth to just 1.25%, from about 2.25%.

Inflation declined to 2.5% in January compared with a year earlier, down from 2.6% in December, the Commerce Department said Friday. Excluding the volatile food and energy categories, core prices dropped to 2.6%, the lowest since June, from 2.9%.

Economists noted that inflation would likely keep cooling, but the progress could be upended by tariffs. Trump said Thursday he would impose 25% duties on imports from Canada and Mexico, though just 10% on oil from Canada. He also said he wanted to double the current tariff on imports from China to 20%.

Trump is also calling for widespread layoffs of federal workers, which could cause hundreds of thousands of job losses and potentially lift the unemployment rate.

Randy Carr, CEO of World Emblem, says the tariffs, if imposed, will force him to raise prices and cut jobs. World Emblem makes patches, labels and badges for companies, universities and law enforcement agencies.

The firm has factories in Georgia and California but it makes about 60% of its products in Mexico. Carr said if the 25% import taxes are imposed, he expects to raise prices by 5% to 10%. He also plans to cut “a handful” of jobs among the 500 workers his company has in the United States to help absorb the rest of the costs.

Carr said he would also cancel about $9 million in planned investments in artificial intelligence and online commerce.

“It’s so annoying,” he said. “Right now you have this volatility, and so you really can’t plan anything. You just got to wait until we get a final verdict from from the administration. It’s definitely not punishing Mexico, it’s punishing us.” The inflation-fighters at the Federal Reserve said in January they planned to keep their key short-term interest rate on hold, at 4.3%, to slow borrowing and spending enough to lower inflation back to their 2% target. The Fed’s elevated rate has contributed to higher borrowing costs for mortgages, auto loans, and credit cards.

The Fed prefers Friday’s inflation measure to the more widely-known consumer price index, which rose for the fourth straight month in January to 3%. Friday’s gauge calculates inflation slightly differently: For example, it puts less weight on the costs of housing and used cars.

Inflation spiked in 2022 to its highest level in four decades, propelling President Donald Trump to the White House and leading the Fed to rapidly raise interest rates to tame prices. It has since fallen from a peak of 7.2%, and some economists expect it could fall closer to 2% in the coming months, absent tariffs.

“The inflation data could be distorted higher at exactly the time when the Fed would otherwise be in a position to declare a win,” Stanley said.

One other bright spot in the report was that incomes jumped 0.9% in January from December, fueled in part by a large annual cost of living adjustment for Social Security beneficiaries.