Data_Note: More bad soft data; some meh hard data

People really, really dislike tariffs.

The UMich consumer sentiment survey continued to drop in today’s preliminary release of May data. It’s now down to its 2nd lowest level on record. As you see, consumers’ expectations about the future are also down, while expectations of inflation are up, both near-term and long-term (second figure).

These surveys have gotten increasingly partisan, but even Rs are getting bummed out. Their sentiment was down 7% in the first half of the month and their inflationary expectations were up.

The data for this report were fielded mostly before the rollback of the China tariffs (from 145% to 30%), so my guess would be that the final May data looks a bit better than this.

Allow me to be a many-handed economist for a moment. On the one hand, there’s an telling signal in these data that people understand something I consider to be fairly nuanced: Trump’s trade war is bad news for them. That’s not obvious as past polling has revealed support for such protectionism. But the survey director stated that “Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy.”

My guess is the fact that people were already unhappy with price levels and the steady drumbeat about the price effects of the President’s trade war—the media’s been good on this—is behind the negative and positive spikes shown in the figures.

On the other hand, the split between bad vibes and good data has gone on for years now, leading me to wonder, especially given the rise in partisanship as a driver of the movements in sentiment surveys, if these surveys have much real economic content. There’s a decent chance that they reflect not economic sentiment or confidence at the survey date based on perceptions of jobs, inflation, interest rates, buying conditions and so on, but more a broad sense of malaise and annoyance with what’s going on in the country.

Turning to hard data, core retail sales—the part of the report that feeds into GDP—ticked down in April (-0.2% ) against expectations for a small rise. It’s not a good sign but this is a noisy series that covers only about a third of consumer spending, and the smoother yr/yr trend, shown below, looks fine.

Housing starts continue to come in soft and slumpy:

Single-family homebuilding dropped to a nine-month low in April as tariffs on imported materials combined with higher mortgage rates raised construction costs, which could hamper the housing market recovery this year.

The report from the Commerce Department on Friday also showed permits for future home construction fell sharply last month.

Mortgage rates have been stuck at ~7% since mid-’22 (see figure). Always hard to know where rates are headed but gotta say, this is looking and feeling like the new normal for this important price. Also, there are some—for now, faint—signals that the bond market could take a jaundiced view of the R’s forthcoming budget plan. My moderately strong prior is that the bias for where the interest-rate term premium (the extra points on the interest rate that lenders need to buy longer-term debt) is headed is up.

Summarizing, I’d take a lot about the current economic moment, but in vibes and real data terms from what this guy John Rainy, Walmart’s CFO, told the WSJ this week:

A 30% tariff on Chinese goods is better than 145%, but still means a meaningful price increase for most consumers.

Walmart is a benchmark price setter, large majorities of us shop there, and they’re already starting to raise some prices. These price effects, along with tariff-uncertainty impact on business planning and investment, are likely to start showing up more than they have already in forthcoming data.

I’d like to be wrong about this, and, if so, I’ll be first to admit it. After all, we’re in unchartered waters (though the ship’s captain is bat-crazy), and the U.S. is less exposed to international trade than most other advanced economies. But neither I nor most other economists would predict anything else given an increase in the effective tariff rate from around 2.5% to 15%. It could be a long summer.