While Canada can retaliate against American tariff threats, our voice carries little weight with the President. What matters are voices with the US. Americans have yet to feel the impact of tariffs, but that doesn’t mean that they aren’t concerned – it’s reflected in growing worries about the economy and inflation. Beyond tariffs, issues like mass deportations and disruptions to government services are becoming real pocketbook concerns.
Uncertainty driven by policy shifts poses one of the biggest risks to the economic outlook. While consumer sentiment is considered a “soft” data source, it provides valuable insight into the mindset of Americans.
We’ve seen this play out before. In 2018-19, the escalating US-China trade war led to a sharp slowdown in business investment and a “growth recession.” In response, the Trump administration de-escalated the trade war, the Federal Reserve cut interest rates by 75 basis points, and the economy rebounded. This time, however, the economic shocks could be broader and more severe.
The University of Michigan’s Consumer Sentiment Index suggests that the honeymoon period for the President may already be over. The index initially rose from 70.5 to 74 in December, just before the election, but has since dropped sharply to 64.7. Similarly, the index measuring public opinion on government policy—historically in the mid-80s—plummeted to 70 in February, marking one of the steepest declines in the survey’s 50-year history.
We’re also seeing growing inflation concerns. While inflation had been decelerating prior to the election, Americans remain frustrated by rising costs. In February, year-ahead inflation expectations jumped from 3.3 per cent to 4.3 per cent, though this data tends to be volatile. More concerning is the upward trend in long-term inflation expectations, now at 3.5%—the highest level in three decades.
Two key points emerge from this: First, it confirms that inflation expectations have already shifted upwards. Second, it highlights that concerns about the impact of tariffs and other cost-related shocks are growing. February’s survey results reflect this trend—long-term inflation expectations began at 3.3% but rose to 3.5% by month-end, suggesting that respondents grew increasingly concerned as policy announcements unfolded.
So far, the stock market has been resilient, largely trading sideways. President Trump seems to view stocks as a gauge of success. However, there are signs the market is closely watching for news of a slowing economy and sticky inflation.
Meeting notes from the Federal Open Markets Committee (FOMC) suggest that the threat of tariffs has led the Fed to pause rate cuts. While the President has been vocal about his view that the Fed should be easing rates, his own policies are working against that move. A recent paper by Boston Fed researchers concluded that tariffs—25 percent on Mexico and Canada, and 10 percent on China—would add 0.8 percentage point to inflation. Unlike Trump’s first term, when retailers absorbed much of the cost of the tariffs through lower profit margins, the expectation now is that businesses, emboldened by pandemic-era inflation, will pass tariff costs on to consumers. While Trump aims to bring supply chains back to American shores, the pandemic showed how disruptions and lengthy adjustments can produce more persistent inflationary pressures.
The labour market is likely to face significant disruptions due to deportation efforts and federal job cuts. Many of those being deported hold lower-paying jobs in sectors like agriculture and construction, which could face significant challenges if replacement workers can’t be found. While cutting 200,000 federal jobs may seem relatively small within the context of the broader US labour market, any disruption to federal services and program delivery could create serious headwinds for the economy.
Downside risks to the US economy are growing. If economic growth slows, possibly dipping below 2 per cent in 2025, it will make it difficult for the Trump administration to avoid reverting to the 2018 playbook and cutting tariffs.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Is algorithmic pricing driving up rents?
A growing controversy over RealPage’s rent-tracking software platform has sparked lawsuits in the US and a Competition Bureau investigation in Canada. With politicians weighing in and regulations looming, is this just modern data analysis—or price fixing?
Learn more in our latest Housing Affordability Watch: Algorithmic Pricing – A Convenient Scapegoat for Rising Rents?
Independent Opinion
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