We are now more than 100 days into the Trump administration and six weeks past the “Liberation Day” tariff announcements. In that time the S&P 500 has reached it’s all time high, sold off more than 20 percent and rallied back more than 20 percent. The bond market is also no stranger to volatility. If we use the 10-year U.S. Treasury yield as a benchmark, it has touched 4.80 percent, 3.80 percent and now sits around 4.50 percent. Large swings in the yield on a risk-free asset are unsettling and contributed to the 90 days pause in the initial tariffs levied on U.S. trading partners. However, there has been one source of stability where it is least expected – economic data. Caution, this may be fleeting.
It would be natural to assume that the complete reassessment of U.S. global trade relationships would have a lasting economic impact. The consumer certainly thinks so. Sentiment data is materially softer post “Liberation Day”. The weaker-than-expected May report from the University of Michigan consumer sentiment index was driven by a further increase in inflation expectations and suggests households remain wary about the tariff outlook. That was the fifth straight monthly fall. Of note, tariffs were mentioned by nearly three-quarters of consumers who were surveyed. Weakening income growth was also picked up in the current assessment of personal finances. Ultimately, the principal reason for the ongoing weakness in sentiment was inflation expectations, which, despite the pause in most reciprocal tariffs, moved higher.
However, while consumers are concerned about higher prices and their personal financial situation, many of these concerns have yet to be reflected in the “hard” economic data. In fact, recent gauges of inflation, employment, and domestic growth have proved resilient at the early stages of this economic recalibration. To recap:
- Inflation: The CPI report for April showed prices rose by less than forecast, coming in at 2.3 percent. Goods categories impacted by tariffs, new cars and apparel, did not see the price increases that were expected. Grocery prices saw the biggest decline since 2020.
- Employment: Nonfarm payrolls increased 177,000 in April after the prior two months’ advances were revised lower. The unemployment rate was unchanged at 4.2 percent. The report suggests the labor market continues to cool gradually, a sign that businesses facing heightened uncertainty around tariffs and turmoil in financial markets have not yet significantly altered their hiring plans.
- Gross Domestic Product: The U.S. economy contracted 0.2 percent in the first quarter, due to a large pre-tariff import surge and more moderate consumer spending. Despite the contraction, consumer spending advanced at a 1.2 percent pace, and the gauge of underlying demand in the economy was solid, helped by the fastest growth in business equipment purchases since 2020.
Looking forward, it is hard to envision this stability persisting. It is likely that the relative calm in the economic data is simply just that the lagged impacts of the policy changes have yet to materialize. However, investors may also be able to take comfort in assuming that the shift in trade policy won’t have the catastrophic impacts initially assumed, and that when paired with the pending tax bill and ongoing deregulation, there may be offsetting factors that smooth the transition to a more balanced, domestically focused, economy. Nonetheless, patience is warranted.
