The Trump Sentiment Slump

Trumpenomics 2.0 is off to a bumpy start for US consumers, with inflation concerns, fears of layoffs and the stock market downturn impacting on both Wall Street and Main Street.

15 April 2025

US consumer sentiment dropped to preliminary reading of 50.8 in April, according to the highly respected University of Michigan survey, compared to 57.0 a month earlier and a buoyant 74.0 as recently as December. If confirmed, April’s 50.8 would be the second-lowest reading since records began in 1952 and lower than anything seen in the aftermath of the 2008 Global Financial Crisis. Somewhat worryingly, the deterioration was seen across age, income, education, region and even political affiliation. The latter point is especially pertinent since Republican-leaning consumers had until recently been far more willing to give Trumpenomics 2.0 the benefit of the doubt than Democrat respondents.

Tariff concerns hit home

The proximate cause of falling consumer sentiment is hardly in doubt. Tariffs threaten price rises across the board for Americans. Wage growth currently stands at 3.8% which may not sound too bad but with headline CPI (Consumer Price Index) inflation at 2.4% that gives a real wage cushion of just 1.4%. According to one leading US investment bank, tariffs could push headline inflation up by fully 1%, almost eliminating consumers’ pricing power. Add in a loosening labour market thanks to layoffs in the government and now corporations too (see Stellantis and GM), and it’s not hard to envisage a situation in which real wages go outright negative very soon.

US consumers are heavily invested in stocks

Adding to the mood of consumer caution is the significant allocation to equities the average US household now has. According to the latest data from last year, US households on average had nearly 30% of their total assets allocated to the stock market. Little wonder then that the volatility seen in equities both before and after ‘Liberation Day’ has resulted in such a quick adjustment to consumer sentiment and real spending patterns – consumers now feel instantly poorer when stocks correct.

The question now is what can be done?

The Federal Reserve is not an obvious source of comfort given its dual mandate of maximising employment and keeping inflation controlled. Such a mission statement was not written with an inflation-led demand shock in mind. The bond market could yet exert the required discipline and 10-year US Treasury yields jumping to 4.4% have yielded some results in the form of the 90-day pause on many of the tariffs. But the real off-ramp may be hidden in plain sight. Angry consumers dictate election results – Joe Biden’s loss in 2024 after all had much to do with 2022’s inflation and voters’ response to it. The worse things get for US consumers, the more nervous the Trump camp will become and the more likely a change of course will occur. It might be counterintuitive to wish for things to get worse but this may be what’s needed. In the meantime, prepare for a bumpy ride.

Stakeholders – US households feel equity volatility much more quickly now:

From 1 Oct 1945 to 1 Oct 2024