In the understatement of 2025 thus far, the headlines emanating from Washington, D.C., have been fast and furious. Whether they be tariff-related, involving federal government cuts or geopolitical in nature, there has been a headline for many facets that investors could think of. Over the last 50 days or so, we have witnessed the impacts of these headlines on Wall St., but the question becomes, are we now seeing signs of an effect on Main St.? In other words, has this “certain uncertainty” begun to reveal itself among U.S. consumers?
According to the preliminary reading from the University of Michigan’s Surveys of Consumers, the answer seems to be in the affirmative. Indeed, not only did overall sentiment slip because of the aforementioned uncertainty quotient, but inflation expectations also rose. To provide some perspective, consumer sentiment dropped due to “declines seen consistently across all groups” and is “currently down 22% from December 2024.”
Interestingly, confidence levels around current conditions were little changed, but future expectations were adversely impacted in the outlook for areas such as “personal finances, labor markets, inflation, business conditions and stock markets.” This divergence captures a truly important aspect for what the U.S. economy may hold for later this year. Is the underlying state of the economy solid enough to absorb the potential negative impacts from this heightened uncertainty?
Here in Q1, investors have seen official real GDP forecasts coming in all over the place. For example, the Atlanta Fed’s GDPNOW forecast has gone from being a +2.3% projection at the end of February to -2.4%, as of this writing, owing to a surge in imports, which may have been just a front-loading phenomenon to avoid potential tariffs. Meanwhile, the N.Y. Fed’s own Nowcast sees Q1 real GDP at +2.7% in its latest report. You want to split the difference; private forecasts seem to be gravitating toward the +1.5% reading.
Meanwhile, consumers’ inflation expectations are on the rise. According to the University of Michigan report, inflation for the year ahead jumped to its highest level since November 2022. However, even more noteworthy, long-run expectations posted their “largest month-over-month increase since 1993,” a 32-year high.
In the past, we’ve been asked the question: how much stock do you put in these consumer confidence reports? Results such as the one discussed here should not be dismissed, but history has shown we’d rather see what the consumer actually does versus what they say. That being said, it does seem reasonable for growth forecasts to be dialed down for Q1. However, looking ahead, it will be the “hard” data that actually matters most, especially for the Fed and, by extension, the stock and bond markets.
For the record, there was one uncertainty that just got removed from the equation: the U.S. government shutdown has been avoided. Our advice: stay tuned and don’t get too caught up in the day-to-day headlines because this is going to be a very fluid situation.
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