Expectations and tariffs

Expectations often come up in economics. If buyers expect the price of a good to rise significantly in the near future demand will increase today. But if buyers expect a recession in the future, they might spend less today if they think they could lose their job.

But with tariffs, it is not clear how things will work. As covered in the last post, tariffs cause a reduction in supply. If that happens across the economy, not only will prices rise but output or GDP could fall, giving us a recession.

The WSJ recently had two articles that touch on this.

See Inflation Fear Is Making Some People Spend More—and Others Less: Fear of rising prices can make upfront purchases rational for some groups, but not all by Telis Demos. Excerpts:

"If consumers are expecting higher prices in the future, they might spend more today. But not if they’re also worried about losing their jobs.

There are conflicting signals coming from the country’s largest credit-card lenders. Some are showing more spending, others less."

"March  . . . showed spending growth was slower for lower-income households than middle- and higher-income ones."

"in 2021, during the bout of inflation following the pandemic . . . With higher inflation expectations, lower-income households had stronger increases in their spending on durable goods"

"these buyers may be counting on future inflation reducing the burden of their debts." (because you pay your debt back in cheaper dollars)

"if consumers perceive economic risk, like job losses, they might spend less regardless of their expectations for prices."

"consumers are easing up on ‘nice to have’ spending by pulling back across restaurant, travel/tourism and leisure spending in February and March." 

See also Americans Are Downbeat on the Economy. They Keep Spending Anyway: People are still buying things at a steady clip, keeping the economy humming—for now by Rachel Louise Ensign. Excerpt:

"Americans are feeling gloomy about the economy after President Trump’s market-rattling first few months in office. Americans are cutting back on vacations and accelerating purchases of products such as cars and smartphones that could be hit by tariffs. But overall they are spending even more than before, which is keeping the economy humming—for now.

Retail sales surged 1.4% in March from a month earlier, the Commerce Department said recently. While car sales posted a big jump, sales were up at restaurants and clothing stores, too."

"That data is surprising because the mood among American consumers and businesses has markedly deteriorated this year. On Friday, the University of Michigan reported that its index of consumer sentiment dropped sharply lower in April from the previous month.

The Conference Board, a business-research group, reported last month that its overall index of consumer confidence fell sharply in March. Its measure of future expectations dropped to the lowest level in 12 years.

The big question is if and when those feelings will lead consumers to pull back. It doesn’t always happen. The Michigan sentiment index, for example, fell sharply from the middle of 2021 to the middle of 2022, when inflation was soaring. Yet while Americans felt bad about the economy, they kept spending."

"How people feel about the economy can depend greatly on whether their preferred candidate is in the White House. Democrats started feeling a lot more morose about the economy after Trump was elected in November; Republicans got a lot more cheerful."