Recent economic data have eased fears that President Donald Trump\u2019s tariffs aren\u2019t yet causing a downturn or spike in inflation, but Wells Fargo is more skeptical.<\/p>\n
In a note on Tuesday, economists Tim Quinlan and Shannon Grein dismissed the \u201cfalse narrative\u201d that tariffs were having a benign impact, pointing out that consumer spending data has actually been revised much lower from more upbeat earlier readings.<\/p>\n
\u201cIt never quite rang true that consumer spending was completely unfazed by the sudden implementation of tariffs,\u201d they wrote. \u201cThis mirage was sustained by initial estimates of GDP growth that pegged the pace of inflation-adjusted Q1 consumer spending at 1.8% (annualized); that\u2019s three-times faster than what it turned out to be in the third estimate\u2014just 0.5%.\u201d<\/p>\n
In fact, data on services spending was even more skewed to the upside, as revisions put growth at just 0.6%, down from an initial print of 2.4%.<\/p>\n
Those trends continued into the second quarter and constitute a clear warning sign largely being overlooked, namely that households are indeed reducing their discretionary spending, according to the note.<\/p>\n
While discretionary spending on goods has held up, spending on services is down 0.3% through May on a year-over-year basis.<\/p>\n
\u201cThat is admittedly a modest decline, but what makes it scary is that in 60+ years, this measure has only declined either during or immediately after recessions,\u201d Quinlan and Grein warned.<\/p>\n
They pointed out that spending on food services and recreational services, which includes things like gym memberships and streaming subscriptions, were barely higher. <\/p>\n
Meanwhile, transportation spending was down 1.1%, led by declines in auto maintenance, taxis and ride-sharing, and air travel, which had the steepest drop at 4.7%.<\/p>\n
\u201cThe fact that households are putting off auto repair, not taking an Uber and cutting back or eliminating air travel points to stretched household budgets,\u201d Wells Fargo said.<\/p>\n
Even increases in spending on goods seem weaker than they appear, as categories like cars and appliances saw big surges that haven\u2019t been sustained. That\u2019s because consumers rushed to buy items before Trump\u2019s tariffs hiked prices, pulling forward purchases to earlier in the year.<\/p>\n
In addition, the muted inflation data appears misleading too, the economists wrote. Many businesses stockpiled extra inventory ahead of tariffs and have been able to draw on those supplies, allowing them to avoid passing on tariffs costs to consumers for now.<\/p>\n
Trump\u2019s on-again, off-again approach to tariffs may also be delaying those pass-throughs and even encouraging some businesses to eat the costs, especially if tariffs are seen as a temporary negotiation tactic, they added.<\/p>\n
\u201cAnother too-good-to-be-true development with respect to tariffs is how broad measures of inflation have yet to register a worrying inflationary shock,\u201d Quinlan and Grein said.<\/p>\n
Others on Wall Street are less downbeat but still see tariffs weighing on the economy. Capital Economics sees tariffs causing a slowdown but not a recession, forecasting GDP growth of 1.6% this year and 1.5% next year.<\/p>\n