The U.S. economy is currently navigating a wave of uncertainty, with American consumers and businesses expressing growing concerns about the potential for rising inflation, particularly as President Donald Trump’s administration considers imposing significant tariffs. This surge in economic anxiety is prompting questions about how such a shift in sentiment might impact consumer spending, hiring practices, and ultimately, the future trajectory of the world’s largest economy. Mark Zandi, chief economist at Moody’s, underscores the gravity of the situation, stating, “The kinds of changes that are occurring under Trump are arguably unprecedented, and it’s making people very nervous. If confidence continues to fall for another three months, and consumers actually pack it in, then game over.”
Recent data paints a troubling picture. Consumer confidence fell sharply in February, marking its steepest monthly decline since August 2021, according to The Conference Board. Similarly, the National Federation of Independent Business (NFIB), which has been tracking data since 1973, reported its third-highest reading ever on its Uncertainty Index for January. These indicators suggest that both consumers and businesses are increasingly uneasy about the economic landscape. Zandi warns that if this downward trend in confidence persists for a few more months, it could have severe consequences, potentially leading to a significant pullback in consumer spending—a critical driver of the U.S. economy.
Despite these worrying trends, economists caution against drawing hasty conclusions. While consumer sentiment has undeniably soured, historical precedents suggest that pessimism does not always translate into reduced spending. For example, in June 2022, when consumer sentiment reached a record low as inflation soared to a 40-year high, American consumers continued to spend at a steady pace in the following months. However, Zandi notes that the current situation may be unique, as the uncertainty fueled by the Trump administration could have a more pronounced impact on consumer behavior. He explains, “It’s way too premature to conclude that recession dynamics are starting to take hold, but this could be a unique time when uncertainty does upend sentiment, and actually causes consumers to pull back.”
The retail sector is particularly vulnerable to shifts in consumer sentiment, as it accounts for roughly one-third of overall consumer spending, which itself constitutes about 70% of the U.S. economy. While there are no clear signs of a consumer pullback just yet, the latest retail sales data is less than encouraging. According to the Commerce Department, retail sales fell 0.9% in January, marking the first monthly decline since August 2024. Economists attribute this dip to unseasonably cold weather, which likely kept shoppers indoors, rather than a broader sign of financial strain. However, the situation bears close monitoring, as further declines could signal a more systemic issue. The Commerce Department is expected to release more comprehensive data on consumer spending in the coming days, which will provide additional insight into the state of the economy.
Adding to the sense of unease, Walmart, the nation’s largest retailer, recently warned that its sales and profit growth could slow in the coming year. The company cited years of high inflation and elevated borrowing costs as key factors contributing to strained consumer finances, particularly for low-income households. Despite these challenges, many economists remain optimistic, citing the resilience of the U.S. job market as a key reason to believe that the economy will avoid a recession. Robert Frick, corporate economist at Navy Federal Credit Union, notes, “The better correlation with spending is with consumer income and the overall health of the job market.” With unemployment at a low 4% and average hourly earnings continuing to rise, the labor market remains a bright spot in an otherwise uncertain economic landscape.
However, the Trump administration’s decision to reduce the federal civilian workforce, at the direction of Elon Musk’s Department of Government Efficiency, could introduce new risks. While the federal workforce represents less than 2% of the total U.S. jobs, layoffs in this sector could still have a psychological impact on consumers, particularly if they occur in close-knit communities. Frick observes, “When layoffs hit close to home, people start getting nervous,” which could lead to a reduction in spending. Despite these concerns, most experts, including Grace Zwemmer, senior economist at Oxford Economics, expect the unemployment rate to remain relatively stable, with only a slight increase anticipated later in the year. For now, the U.S. economy appears to be navigating a delicate balance between uncertainty and resilience, with consumer sentiment and spending patterns playing a crucial role in determining its future trajectory.
