submitted by
Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
Since “Liberation Day” we’ve been hearing a lot about the soft and hard data. The soft data includes surveys, like consumer sentiment, confidence, and manufacturing, such as the ISM Index. Hard data include economic releases with real numbers, like unemployment claims, employment reports, consumer spending, and inflation. Soft data has been weak and plunging, and the hard data has yet to point to any significant slowdown. The big question now is whether we will see convergence between soft and hard data.
Back in 2022, consumer sentiment data was in the tank, as prices rose to a 40-year high. Consumers continued to spend, however. Strong labor markets and household balance sheets propelled the resilient consumer. Despite forecasts of a near recession, the economy avoided one, and equity markets continued to surge in 2023 and 2024.
Soft data, like the latest consumer sentiment numbers, showed another decline from March. The April reading of 52.2 is inching closer to the bottom of sentiment that hit in 2022, getting closer to the lowest level going all the way back to the 50s. Will this time be different, with consumers finally putting the brakes on spending, which makes up two-thirds of the economy? If there is a recession, it will be a consumer-led recession, and that is why this question is the key.
Expectations about the economy are even worse, reaching the bottom we observed in 2022, and the swiftest decline in consumer expectations since the 1990s. Consumer sentiment continues to nosedive, and the effects of tariffs have not even hit the shelves, no pun intended. We’ll see an economy move from one that was often described as consumer resilience to consumer anger. Conflicting signals from soft and hard data are all about timing. As we go through time, and assuming that tariffs are not erased with a late-night tweet, the data will converge, and the economy will likely then hit a brick wall.
Some hard data that might be an early warning is the count of containers coming into key ports. In just the first three months of the year, container counts coming into the Port of Los Angeles have declined by over 100,000, representing a 20% decline. This is prior to Liberation Day, and so we will likely see an additional acceleration of declines in April.
Yes, a decline in shipments implies a decline in imports, the justification and motivation of tariffs. But every container coming off those ships also represents revenue streams. Every box in each container is a product line of Main Street USA. These revenue streams make it possible for businesses, both large and small, to meet financial obligations such as payroll, capital investment, and financing expenses. In some cases, products may be replaced with domestically sourced ones, but that will likely be the exception; toaster manufacturers will not pop up overnight. Lower revenue streams equate to business closures and layoffs. It will take some time for this to ripple through the economy, just like the time it takes a wave to hit the other side of the pond, from the unexpected drop of deadweight.
So far, however, we are seeing the opposite in some of the hard data. Retail sales saw a big increase this month, far exceeding the consensus estimates. Durable goods orders shot up in March, exceeding estimates by a wide margin. Are we seeing the return of animal spirits, where consumers and businesses move fast as we enter a “Golden Age”? Or perhaps there is a rush to purchase before tariffs kick in? I think it is the latter. The recent surge in spending is simply early planning to avoid higher prices and supply chain disruptions around the corner.
One indicator that may be another early sign of the slowdown to come is consumer credit. Only one data point, but the latest saw a drop in consumer credit, where the consensus was a large gain. Expectations for future economic conditions have plummeted, and households are simply moving to get their financial house in order. That explains the big turnabout in consumer credit. After loading up on early purchases, we’ll see a somewhat of a cliff in consumer spending.
The plus side of all this is that a reduction in interest rates by the Fed may come sooner than later. Probabilities are now showing four interest rate reductions this year. Market participants are pricing a slowdown in the economy; the Fed may be forced to shift emphasis from inflation control to stabilizing employment. And perhaps best of all, the nation’s trade deficit will shrink, just as prior recessions and slowdowns coincided with either trade surpluses or a reduction in the trade deficit. “Other than that, Mrs. Lincoln, how was the play?”
