American consumers are getting nervous about inflation again. For now, they’re still spending

By Bryan Mena, CNN

Washington (CNN) — Americans are still opening their wallets, with unemployment remaining low and businesses blunting the effects of President Donald Trump’s widespread tariffs.

But consumers remain skittish over Trump’s erratic trade war, according to recent surveys. Still, they haven’t cut back and consumer prices have remained somewhat tame.

Businesses have played a key role in keeping the economy afloat, despite persistent economic jitters. For instance, companies mostly have not ramped up layoffs to deal with the cost pressures arising from Trump’s tariffs. Unemployment remains low at 4.2%, and if Americans have a job, then they’re able to spend and save.

Companies have also managed Trump’s confusing onslaught of tariffs through a serious of maneuvers that have, so far, kept inflation from surging; a recent report from the Federal Reserve Bank of Richmond detailed all those strategies.

After briefly improving from the near-record lows in the spring, consumer sentiment went into reverse again this month, the University of Michigan said Friday. But that might not mean anything for spending, since sentiment has been a lousy predictor of purchasing behavior in recent years.

Put together, this has allowed consumers to continue to power the US economy with their spending, which contributes about 70% of economic output (though there are signs of caution on how long this resilience can last.)

“As long as consumer spending holds up and companies are able to retain workers because of that robust spending, the flywheel can continue to spin, pushing corporate profits and stock prices higher,” Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in commentary issued Friday.

What businesses are doing to manage tariffs

Since the beginning of the year, Trump has rewritten US trade policy, with a new wave of tariffs that went into earlier this month. Businesses have scrambled to deal with the fallout.

Economists have long said that tariffs will likely stoke consumer inflation, but so far, that hasn’t happened. That might be because of how businesses have handled the situation, according to a recent analysis from the Richmond Fed that looked at survey responses from businesses.

The report said that businesses have delayed ordering inventories, delayed the timing of when a tariff is charged and negotiated partnerships with suppliers and customers to share costs. Many businesses also stocked up on inventories in the beginning of the year to avoid tariff-induced sticker shock.

And fortunately for the American worker, one of those strategies hasn’t been to trim headcount. New applications for unemployment benefits remain low, according to Labor Department data.

That’s done the trick in keeping a lid on consumer inflation, but it might not last for much longer. The latest Producer Price Index, which measures the prices businesses pay their suppliers, surged 0.9% in July from the prior month, lifting the annual rate to 3.3%. The monthly and annual figures both rose much more than economists had expected.

“Sensing from businesses suggests that the impact of tariffs on their price-setting has been lagged, but it is starting to play out,” Richmond Fed economists said in their paper. “Nonetheless, it remains highly uncertain how tariffs will impact consumer inflation.”

Spooked but still spending

Consumer sentiment remains well below where it was late last year, after the presidential election. But it hasn’t — and probably still won’t — predict how Americans spend in the months ahead.

Consumer sentiment fell 5% this month to a preliminary reading of 58.6, the University of Michigan said Friday, falling for the first time in four months. Sentiment had improved, with consumers feeling a sense of relief that the worst of Trump’s trade war might finally be in the rearview mirror.

But the effects of Trump’s tariffs are still very much up in the air.

“Consumers are no longer bracing for the worst-case scenario for the economy feared in April when reciprocal tariffs were announced and then paused,” Joanne Hsu, the survey’s director, said in a release. “However, consumers continue to expect both inflation and unemployment to deteriorate in the future.”

Their expectations for inflation rates in the year ahead rose to 4.9% this month, up from 4.5% in July.

Still, Americans will likely continue to spend, just as they did in 2022 when sentiment fell to a record low because inflation was running at 40-year highs. Or in 2023, when a standoff in Congress over the debt ceiling prompted sentiment to fall, yet spending remain robust all throughout that year.

Resilient spending

Spending at US retailers rose 0.5% in July, the Commerce Department said Friday. That’s down from June’s upwardly revised 0.9% gain, and in line with economists’ expectations.

Retail sales picked up across categories last month, especially at car dealerships and furniture stores, which saw sales climb 1.6% and 1.4%, respectively. Online sales jumped 0.8% in July, coinciding with Amazon’s Prime Day sale. Spending also picked up at gas stations and department stores.

Retail sales are adjusted for seasonal swings, but not inflation.

Meanwhile, spending was down among only a handful of categories, including home improvement stores (-1%) and electronics retailers (-0.6%). Restaurants and bars also saw sales decline in July, falling 0.4% and extending an unusually weak period of sales growth.

A subset of retail sales that excludes volatile categories — known as the “control group” — rose 0.5% in July, slightly better than the 0.4% gain economists projected in a FactSet poll. That measure is seen as a better gauge of underlying consumer demand.

Even after factoring in July’s 0.2% monthly increase in consumer prices, according to the Consumer Price Index, retail sales were still up a healthy 0.3% last month.

“What consumers do is more important to the economy than what they say,” Bill Adams, chief economist at Comerica Bank, said in an analyst note Friday.

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