Financial News for the Week of March 28th, 2025

After steadily rallying since mid-March, markets took a step back this week when new U.S. tariffs on automobiles and parts were announced. The news comes ahead of next week’s much anticipated update on reciprocal tariffs that are expected to cover major U.S. trading partners. In the meantime, February’s Personal Income and Outlays report showed that core inflation picked up again, while spending growth failed to recover from last month’s decline in financial news. The U.S. economy had been humming, but as uncertainty ramps up and consumer confidence continues to dip, the risks of a slowdown are building. All eyes are now firmly focused on next week’s tariff announcement for more clarity on the operating environment going forward.

The big news this week was President Trump’s announcement of new tariffs on automobile imports of 25%, set to take effect on April 3rd. This comes ahead of the expected announcement next week on reciprocal tariffs that markets had been bracing for. At the time of writing, most countries had held off on any new retaliation, likely opting to wait and see what’s in store from next week’s announcements before proceeding. As we wrote, the full impact of the autos tariffs will depend on their duration and how much of the cost firms pass along to their customers.

Yet, while we await more clarity on the import taxes, consumer confidence continues to dip, and the darkening moods appear to be flowing through to behavior. The Conference Board measure of consumer confidence has fallen to its lowest level since early-2021. With sinking sentiment, an adjustment in consumer spending appears to be unfolding as real outlays in February failed to recover from the tumble they took in January (Chart 1). This leaves the three-month annualized change in real consumer spending at 0.2%, well short of the 4.6% clip recorded in December. First quarter consumer spending is now tracking only a 0.5% annualized pace, a downgrade from our recent forecast. Importantly, the pullback in real spending is coming at a time of still-healthy income growth, so with the savings rate ticking up to 4.6% (its highest level since June of last year), this suggests that some precautionary savings could be taking place.

Part of the story is that inflation looks to be heating up again. Higher price growth is cutting into consumers’ purchasing power, restraining real outlays. The core personal consumption expenditures price index saw its biggest monthly gain since January of last year, taking the annual pace to 2.8% (Chart 2). Inflation momentum appears to be gaining steam, and consumer are noticing. Inflation expectations for the year ahead jumped to their highest levels since late-2022.

For the Fed, the combination of softening growth and rising inflation are troublesome. Yet, what could make it more complicated is if inflation expectations continue to rise, creating a self-reinforcing loop of greater price pressures. For now, though, we wait for next week for more clarity on the next set of tariffs to better guide our assumptions around the forecast.