Companies and Consumers Are Holding Their Breath Ahead of Wednesday’s Tariff News

Just two weeks ago, an impending recession seemed fairly unlikely.

But there are clearer signs now that anxious U.S. consumers are spending less, prompting economists to get more worried a downturn could follow.

Wednesday’s news on tariffs could be critical for consumers and companies. The White House is dubbing President’s Donald Trump’s announcement of global tariffs “Liberation Day,” as it aims to supercharge U.S. manufacturing by punishing countries that have steep tariffs on U.S. goods. The administration has acknowledged the possibility of short-term economic pain, and both Wall Street and Main Street are nervous.

“Most indicators still portray an economy that is running comfortably above recessionary waters,” Bob Schwartz, senior economist at Oxford Economics, wrote in a note to clients. “But that sinking feeling is becoming more palpable, and downward revisions to growth forecasts are spreading.”

Stock markets remain volatile. The S&P 500 is down more than 4% this year, while the tech-heavy Nasdaq has fallen nearly 10%. Big U.S. companies have issued more cautious first-quarter earnings guidance than usual. CEOs feel less optimistic, and manufacturing activity slumped in March as tariffs loomed.

Consumers are nervous, too. Sentiment plunged 12% in a March survey from the University of Michigan that found consumers’ expectations of unemployment in the coming year at the highest level since 2009, just after the financial crisis.

Worry No. 1: Slower Consumer Spending Could Cause Recession

A skittish U.S. consumer doesn’t necessarily mean trouble. As long as they keep their wallets out, consumer spending can keep the economy afloat. 

But recent data suggests a “meaningful deceleration in activity is beginning to emerge,” according to Jonathan Millar, a senior economist at British bank Barclays. He pointed to February’s weaker-than-expected consumer spending data, including a 0.1% decline in services spending compared to January. 

The decline was small, but it’s potentially worrying since services have been “anchoring household spending throughout this expansion,” he wrote. Once the COVID-driven boom in spending on appliances and other goods died down, consumers quickly ramped up spending on services such as restaurants, hotels and concerts.

February’s data was also disappointing given expectations for a strong rebound from January, when cold weather tamped down spending. Slower spending will drag down GDP this quarter and potentially bring it into negative territory without an “exceptional jump” in March, wrote Schwartz, of Oxford Economics. 

“One quarter does not make a recession, of course, and there is every reason to believe that a spring rebound is in the cards,” Schwartz wrote. But consumers’ gloominess, he added, may “become a self-fulfilling prophecy.”

Worry No. 2: Stagflation Would Complicate the Federal Reserve’s Job

Fed Chairman Jerome Powell, who’s scheduled to speak Friday, has said the economy remains “solid” even as he’s flagged rising uncertainties. Private-sector forecasters have bumped up their probabilities of a downturn, Powell said last month, but those odds remain “relatively moderate” and increased from “extremely low” levels.”

He also pushed back against recent chatter about “stagflation,” the mix of economic stagnation combined with an upward spiral in prices. 

The Fed faced that scenario in the 1970s, partly as a result of soaring oil prices. To bring inflation back under control, former Fed Chair Paul Volcker slowed the economy by jacking up interest rates to more than 20%. It resulted in a recession in which unemployment peaked near 10%, but the Fed’s actions halted the price spiral.

The U.S. is not “in a situation that’s remotely comparable to that,” Powell told reporters last month. Inflation is closer to the Fed’s 2% target, all while the unemployment rate is at 4.1%, he said. “I don’t see any reason to think that we’re looking at a replay of the ’70s,” Powell said.

But the risks are rising that a weaker economy collides with rising prices on goods facing tariffs. For example, wrote Scott Anderson, chief U.S. economist at BMO Capital Markets, car prices could rise by thousands of dollars as tariffs on imported automobiles kick in.

“Stagflationary risks continue to build as protectionist trade policy collides with a U.S. consumer that is currently having second thoughts about its financial and economic future,” Anderson wrote.