US Consumers Hit the Brakes as Tariff Fatigue Starts to Show

Greg Boutle, Head of US Equity & Derivative Strategy at BNP Paribas, reacts to PCE.

US consumers hit the brakes in April while goods imports plummeted by a record as companies adjusted to higher tariffs.

Inflation-adjusted personal spending rose 0.1% after rising 0.7% a month earlier, Bureau of Economic Analysis data showed Friday. Separate data showed an almost 20% slump in imports, leading to a massive narrowing in the US merchandise-trade deficit in April.

Meanwhile, the Federal Reserve’s preferred price gauge remained tame. The personal consumption expenditures price index, excluding food and energy, increased 0.1% from a month earlier. Compared with a year earlier, the so-called core inflation gauge rose 2.5% from April 2024 — the smallest annual advance in more than four years.

The data offer a snapshot of the economy during a month when the Trump administration raised tariffs on China goods to 145%, roiling stock markets and prompting companies to halt orders for imported goods.

The figures reflect an undercurrent of anxiety among many American consumers about the economy after the weakest quarter for spending in nearly two years. Higher duties on imports had yet to show up more broadly in higher goods prices, as sentiment slumped and the outlook for personal finances stood at a record low.

Levies have since come down after the US and China agreed to a temporary drop in tariffs on their respective goods while the two countries negotiate a deal. The trade truce has led to a rebound in the University of Michigan’s final May consumer sentiment index published Friday.

Still, the constant state of flux in trade policy is fueling further uncertainty. This week a US court issued a ruling that blocks many of the import taxes, and on Friday President Donald Trump accused China of violating an agreement with the US to ease tariffs, ratcheting up tensions between the world’s two largest economies.

“American spending moderated in April as US businesses pulled back significantly on imports after months of pulling forward economic activity to avoid tariff policy,” Joseph Brusuelas, chief economist at RSM US LLP, said in a note. “This only adds to the uncertainty around the economic outlook at a time when trade policy changes on an almost daily basis.”

Besides the punitive tariffs in place last month on Chinese products, the slump in goods imports probably reflected a reversal in the inflow of pharmaceuticals following a surge in March and a decline of gold imports, Matthew Martin, senior US economist at Oxford Economics, wrote in a note.

Because of the way gross domestic product is calculated, the April slump in imports of goods after months of front loading will likely give a boost to GDP in the second quarter. The impact from massive trade deficits helped drag the economy into a contraction in the first quarter.

After the report, the Atlanta Fed’s GDPNow forecast penciled in a 3.8% increase for the second quarter, which would mark a bounceback from the 0.2% drop last quarter. The estimate will change in coming weeks as more economic data are published.

Meanwhile, Fed policymakers will likely keep interest rates unchanged for the foreseeable future until they get more clarity on the impact of tariffs not only on prices but also on other pillars of the economy like the labor market and consumer spending.

The modest rise in April spending reflected an increase in services that more than offset a decline in durable goods outlays.

Economists are paying close attention to the degree to which companies are passing through higher import duties to consumers. A measure of goods inflation that excludes food and energy climbed 0.3%.

While many companies have so far been absorbing or offsetting much of the hit from tariffs, retailers including Walmart Inc. and Macy’s Inc. have indicated Americans will start seeing price hikes soon.

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