Christopher Lugerber and Anne Die Inogeo, AP Business Writer
WASHINGTON (AP) — The ongoing threat of tariffs from Washington and the possibility of government employment cuts could lead to a darker mood for consumers and place a major emphasis on an otherwise healthy economy.
Data released Friday showed that consumers had the most spending cut since February 2021, even if their income rose. In a positive note, although inflation has cooled, President Donald Trump’s threat to impose major import taxes on Canada, Mexico and China (the top US trading partners) is likely to push prices higher, economists say. Some companies already plan to raise prices accordingly.
Americans cut 0.2% from the previous month to January, the Commerce Department said Friday. However, retreats may suggest that they will attract more attention from consumers amid growing economic uncertainty.
“The news headline roller coaster emanating from Washington, D.C., will appear to be pushing businesses on the sidelines for a while and affecting consumers,” Steven Stanley, chief US economist at Santander, said in an email.
The cuts in consumer spending, coupled with a surge in imports in January, reported on Friday as businesses were seeking tariffs on frontruns, but the Atlanta branch of the Federal Reserve predicted that the economy would shrink by 1.5% per annum due to a sharp slowdown from a 2.3% growth in the last three months of January to March.
Most analysts still hope that the economy will expand in the first quarter, but at a much slower pace. Stanley reduced its first-quarter growth estimate from around 2.25% to just 1.25%.
He said Friday and Friday. Excluding the volatile food and energy categories, core prices fell to 2.6%, the lowest since June, down from 2.9%.
The economist said there is a high possibility that inflation will continue to cool, but noted that the progress could be overwhelmed by tariffs. Trump said Thursday he would place 25% of his duties on imports from Canada and Mexico, but only 10% of oil from Canada. He also said he would like to double the current tariffs on imports from China to 20%.
Trump is also calling for widespread layoffs of federal workers, which could lead to unemployment for hundreds of thousands of people and potentially raise the unemployment rate.
World Emblem CEO Randy Carr says that if tariffs are imposed, they will force them to raise prices and cut jobs. World Emblem creates patches, labels and badges for businesses, universities and law enforcement agencies.
The company has factories in Georgia and California, but its products are in Mexico. Carr said he expects the price to rise by 10% from 5% if an import tax of 25% is imposed. He also plans to cut “a handful” jobs among the 500 workers his company has in the US to absorb the remaining costs.
Carr said he would cancel about $9 million with planned investments in artificial intelligence and online commerce.
“It’s very annoying,” he said. “Now you have this volatility so you can’t really plan anything. You have to wait until you get a final verdict from the administration. It definitely isn’t punishing Mexico, it’s punishing us.”
The Federal Reserve inflation fighter said in January that he planned to hold a key short-term interest rate on 4.3%, delay borrowing and spend enough to return it to its 2% target. The Fed’s rise has contributed to increased borrowing costs for mortgages, car loans and credit cards.
The Fed prefers Friday’s inflation measures over the more widely known consumer price index. This rose to 3% for the four months of January. Friday’s gauge calculates inflation slightly differently. For example, homes and used cars cost less weight.
Inflation surged to its highest level in 40 years in 2022, pushing President Donald Trump into the White House, leading the Fed and rapidly raising interest rates to tame prices. It has since fallen from its 7.2% peak, with some economists expecting there will be no tariffs and will be able to approach 2% in the coming months.
“Inflation data can be skewed precisely high when the Fed is in a position to declare victory,” Stanley said.
Another bright spot in the report is that revenue jumped 0.9% from December in January, partly promoting some of the annual annual adjustment costs for Social Security beneficiaries.
But Americans didn’t spend much anyway, especially on cars where shopping was dwindling rapidly. Some consumers may be trying to save money after being splashed during the holiday shopping season. The economist said credit card debt had skyrocketed in December.
The main concern right now is whether tariffs are pushing inflation, or slowing the economy, or is it a particularly toxic combination.
Jeffrey Schmidt, president of the Fed’s Kansas City chapter, said Thursday he was “more cautious” about inflation as it is part of Americans’ expectations of higher prices in the coming months.
However, he also said discussions with businesses in his district “indicating uncertainty could put pressure on growth.” A weak economy usually leads the Fed to cut interest rates, but if inflation remains a threat, it probably won’t change the rate.
Many toy companies expressed relief when they announced that they had only announced a 10% increase in tariffs on products from China, as they thought Trump could share additional costs with retailers. However, a 20% tariff means that many have no choice but to raise prices. Industry reports show that about 80% of toys sold in the US are made in China.
Curtis McGill, CFO Hey Buddy Hey Pal, a small toy maker, called the move a “nightmare scenario.”
McGill had just checked the prices of a toy with one major retailer on Wednesday, but had to withdraw it after hearing about the tariffs. We estimate that during the end of the year holiday season, his toys will see a 10% increase in price.
And Walmart, the country’s largest retailer, last week cited uncertainties about American consumer health, providing estimates of lower sales growth than expected this year, bringing stocks down.
Anxious about tariffs that pushed prices higher has plunged consumer confidence and unleashed the modest profits that came after the election.
d’Hynenzio was reported from New York. Associated writer Josh Boak contributed to this report.
Original issue: February 28, 2025, 8:51am EST
