Week of May 26
Tariff Whiplash
Another week, and another back and forth on tariffs. On Wednesday the Court of International Trade struck down some, but not all, of the tariffs imposed by the Trump administration. The stock market gained. Then on Thursday, a federal appeals court ruled that the tariffs could remain in place pending appeal. The stock market fell. Then finally additional duties on imported steel and aluminum.
The data last week reflected businesses and consumers that are clearly stuck in the middle of this tariff tennis match. And they will continue to sit on the sidelines leading to an economic slowdown over the course of the year.
Important Data Points From The Past Week
U.S. Durable Goods Orders
New orders for nondefense capital goods fell 1.3% from March to April to $74.8 billion. Orders have been elevated over the last several months due to the front loading of orders prior to the tariffs taking effect.
The back and forth on tariff policy has businesses worried and orders are likely to remain suppressed over the next several months as inventory is up. This could extend into the fall as overall economic demand remains weak. The signs are still pointing to the economy slowing through the third quarter.
The cease fire in the trade war with China resulted in a bounce back in consumer sentiment in April. This is the first time in five months that confidence has improved. The Present Situation Index remained steady, reflecting short-term faith in the labor market. Most importantly though, the Expectations Index posted a sharp increase, suggesting that consumers feel that economic outlook is not as dire as they thought. The rebound in the stock market last month certainly helped here.
The impact on consumer spending, though, is murky. Retail spending has been trending higher over the last three months. Was that due to pre-spending before prices rose (like what we saw in new durable goods orders over the last several months)? My sense is that we will see consumer spending moderate over the next two to three months, despite their optimistic feeling.
U.S. Gross Domestic Product (GDP)
The second estimate of U.S. GDP was revised from the original -0.3% annualized decline to -0.2%. The upward revision was mostly due to a stronger estimate for business investment. The contributions to this growth paint an interesting, but not surprising, picture. Consumer spending accounted for a paltry 0.8%, while private investment contributed just under 4%. This surge was centered around IT equipment and likely reflects pre-orders in advance of tariffs. Speaking of which, the main drag on economic output was a flood of imports as orders from abroad were coming into the U.S. before the President’s tariffs took hold.
Imports aside, the slowdown in consumer spending is troublesome and is another sign that the economy was on shaky ground in advance of the tariffs. While consumer confidence did pick up slightly in April when the cease fire with China was announced. The recent news of a pause on tariffs to Europe and the blocking of the tariffs by a U.S. court may give consumers and businesses reason for hope, but the economy is still likely to slow further over the summer before rebounding in the later in the year. The shape and amplitude of that rebound will depend heavily on the future course of tariffs.
U.S. Personal Consumption Expenditure Deflator
The Fed’s preferred measure of inflation cooled in April, falling to 2.2% on a year-over-year basis from 2.3%. The core measure slipped two tenths from 2.7% to 2.5%. This deflationary trend is unlikely to continue as tariffs fully bake their way into prices over the next couple of months. The data also showed that consumer spending cooled down, driven by a decline in spending on durable goods. This data is unlikely to sway the Fed one way or the other when they meet at the end of June. I think they hold rates steady.
University of Michigan Consumer Sentiment
The University of Michigan survey of consumer sentiment was flat from April to May indicating that the tariff cease fire with China has stemmed the tide of plunging confidence. That being said, the potential for a China deal didn’t improve the situation either. Consumers will continue to rethink any major spending until there is a clearer track on tariff policy.
Conference Board Consumer Confidence
What I’ll Be Watching This Week
This is a pretty full data week in the U.S. with construction spending, vehicle sales, and the all-important jobs numbers. In Canada the Bank of Canada will decide on whether to cut rates.
What I Watched Last Week
Think Ted Lasso, but not really. A dysfunctional family takes over the reins of a professional basketball team when their father passes away.
How Can I Help?
I’m taking on a limited number of clients to help with bespoke analysis of the economy and construction and what it means for your company. I’m also available if you’re in need of a speaker at an event or someone to come talk to leadership groups on the state of the economy, demographics, real estate, and construction.
If you want to discuss either option, sign up for a spot on my calendar.
Do you know someone who would benefit from the information in this newsletter? Please share the sign up link with them.