The current US economic landscape is characterised by rising inflation and a decrease in consumer spending.
These existing trends are likely to be exacerbated by the implementation of protectionist US policies.
Analysts at ING Group believe that US President Donald Trump’s tariff narratives and government spending cuts are expected to intensify hotter inflation and lower consumer spending.
Tariffs, which are taxes on imported goods, can lead to higher prices for consumers, contributing to inflationary pressures.
Additionally, they can disrupt global supply chains and reduce competition, further fueling inflation.
Reduced consumer spending can result from higher prices and decreased confidence in the economy, leading to a slowdown in economic growth.
Government spending cuts can also have a negative impact on the economy.
They can lead to job losses, reduced public services, and decreased investment, all of which can contribute to a decline in economic activity and consumer spending.
Stagflation concerns
The Fed’s ability to implement further rate cuts will be limited due to growing concerns around stagflation, ING Group said in a report.
The most recent economic data reveals that inflationary pressures remain strong, while consumer spending is faltering.
The Federal Reserve’s preferred gauge of inflation, the core Personal Consumption Expenditures (PCE) deflator, increased by 0.4% month-over-month in February, exceeding expectations.
This suggests that the Fed’s efforts to curb inflation may not be working as quickly as hoped.
Furthermore, real personal spending, which is adjusted for inflation, only rose by 0.1% month-over-month, indicating that consumers are becoming more cautious with their spending.
This weakness in consumer spending was further underscored by a downward revision of January’s real personal spending from a contraction of 0.5% to a contraction of 0.6%.
Source: ING Research
Recession woes
The combination of persistent inflation and sluggish consumer spending raises concerns about the potential for a recession.
The inflation data is alarming, but not entirely unexpected, according to ING’s James Knightley, chief international economist, US.
Given the composition of the CPI and PPI inputs, ING anticipates that the risk to the 0.3% month-on-month consensus number was to the upside.
“Remember that we need to average 0.17% MoM over time to bring us down to the 2% year-on-year target,” Knightley said in the report.
We are moving in the wrong direction and the concern is that tariffs threaten higher prices, which mean the inflation prints are going to remain hot. This will constrain the Fed’s ability to deliver further interest rate cuts.
Rate cuts
“From a growth perspective those potential rate cuts can’t come quickly enough,” Knightley said.
Sentiment has fallen sharply due to tariff-related fears of reduced spending power and job concerns linked to the Department for Government Efficiency’s actions.
This decline in consumer confidence appears to be resulting in significantly reduced spending.
“Fed Chair Powell was fairly dismissive of this narrative earlier this month so it will be interesting to see if he changes his tune next week,” Knightley added.
Downward revisions to GDP
Many banks will likely issue downward revisions to their first quarter GDP growth forecasts over the weekend, according to ING.
The first negative result since the second quarter of 2020, when the pandemic was at its worst, would occur if March’s real consumer spending is flat, resulting in a -0.1% annualized rate for the first quarter.
“Given the drag from awful trade numbers this really does run the risk of a negative first quarter GDP growth rate,” Knightley said.
As we head towards ‘Liberation Day’ on Wednesday and then the jobs report on Friday followed by Powell’s speech on the economic outlook, this sets us up for a volatile week ahead for markets.
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