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Fears of a tariff-fueled trade war are dragging consumer sentiment down to near all-time lows, while inflation worries continue to drive up mortgage rates as investors who back most home loans demand higher yields.
The University of Michigan Index of Consumer Sentiment fell 11 percent from March to April and is down 31 percent from December, according to preliminary data released Friday.
At 50.8 in April, the Index of Consumer Sentiment is in territory not seen since the height of the pandemic, when it hit an all-time low of 50 in June 2022.
“Consumers report multiple warning signs that raise the risk of recession,” survey Director Joanne Hsu said in a statement. Consumer expectations for business conditions, personal finances, incomes, inflation and labor markets “all continued to deteriorate this month.”
Consumer sentiment near all-time low
The index — benchmarked at 100 back in 1966 — is now lower than at any point during the Great Recession of 2007-2009, when it dropped into the mid-50s. Before that, the Index of Consumer Sentiment’s lowest reading was 51.7, registered in 1980 when the nation was in the grips of a recession and grappling with double-digit inflation.
“Consumers have spiraled from anxious to petrified,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
Samuel Tombs
But many real-time indicators of consumers’ spending show no sign of a slowdown, Tombs said, and forecasters at Pantheon Macroeconomics “remain comfortable with our base case that households’ real spending stagnates in Q2 and Q3, rather than drops outright.”
Consumers surveyed by the University of Michigan between March 25 and April 8 said they expect inflation will climb to 6.7 percent in the year ahead — the highest reading since 1981.
“People probably are even more downbeat now,” Tombs said, given that some responses were collected before the April 2 tariff announcement and the plunge in stock prices that followed.
While Democrats are more pessimistic than Republicans about the economy and the prospect of higher inflation, sentiment among all three political groups (Democrats, Republicans, and Independents) has deteriorated this year.
Joanne Hsu
That demonstrates declines in national estimates “are not being driven by disproportionate declines among Democrats alone following the election of a Republican president,” Hsu said in a separate report.
Consumer Price Index data released Thursday showed inflation dropped closer to the Federal Reserve’s 2 percent target for the second month in a row in March.
But tariff-driven price increases aren’t likely to show up in the data until May, and Federal Reserve policymakers say they expect tariffs implemented by the Trump administration so far could have an inflationary impact on prices while also slowing economic growth.
John Williams
New York Fed President John Williams said Friday that he expects the combination of reduced immigration, tariffs, and uncertainty will slow annual U.S. economic growth to less than 1 percent and drive unemployment up from 4.2 percent to as high as 5 percent over the next year.
“I expect increased tariffs to boost inflation this year to somewhere between 3-1/2 and 4 percent,” Williams said in prepared remarks to the Puerto Rico Chamber of Commerce.
Alberto Musalem
Addressing the Arkansas Bankers Association on Friday, St. Louis Fed President Alberto Musalem said declining consumer confidence, higher prices, and lower real incomes associated with tariffs, and diminished wealth resulting from lower equity prices are all “notable actual or potential headwinds.”
Musalem noted that even before the recent tariff announcements, “surveys indicated consumer confidence had declined, which poses downside risk to household spending and the overall pace of economic activity going forward.”
Susan Collins
Susan Collins, president of the Federal Reserve Bank of Boston, told Yahoo Finance she expects tariffs will slow economic growth and push inflation well above 3 percent this year, which might mean the Fed waits longer to cut interest rates this year.
Williams, Musalem, and Collins are all voting members of the Fed’s rate-setting policy team, the Federal Open Market Committee, which meets next on May 6-7. Futures markets tracked by the CME FedWatch tool show investors don’t expect the Fed to cut rates until June and that the odds of a June rate cut have dropped from 94 percent on April 4 to 76 percent Friday.
Worries about the impacts of tariffs have hammered the stock market, which initially helped bring mortgage rates and yields on government bonds down as investors moved money out of stocks and into bonds in a flight to safety.
But in recent days, bond yields and mortgage rates have been headed back up, as the Trump administration moved forward with a 145 percent tariff on goods from China and a 10 percent baseline tariff that applied to most other U.S. trading partners.
China — America’s third-largest trading partner — has vowed to fight tariffs “until the end,” initially ratcheting up retaliatory duties on U.S. goods to 84 percent and then to 125 percent on Friday.
Mortgage rates bounce back
After retreating to a 2025 low of 6.48 percent on April 8, rates on 30-year fixed-rate conforming mortgages bounced back to 6.82 percent this week, according to rate lock data tracked by Optimal Blue. Rates on jumbo mortgages exceeding Fannie Mae and Freddie Mac’s $806,500 conforming loan limit in most markets hit 6.93 percent Wednesday.
Yields on 10-year Treasurys — a barometer for mortgage rates that Treasury Secretary Scott Bessent has said is also a key metric for the Trump administration — have also climbed from a 2025 low of 3.89 percent on April 4 to 4.49 percent a week later.
In announcing a 90-day pause on country-specific “reciprocal” tariffs on dozens of U.S. trading partners on April 9, Trump indicated that he’d been watching bond yields rise, noting “people were getting a little queasy.”
“The Treasury market freaked everyone out this week,” when yields climbed even as the stock market tanked — the opposite of the usual flight to safety reaction, Wall Street Journal columnist Jon Sindreu noted Friday.
Sindreu explored several theories that have been floated for the lack of demand for government bonds that’s been pushing rates up.
A leading theory is that hedge funds that buy bonds and sell futures contracts against them have been forced to unwind such “Treasury cash-futures basis trades” by selling government bonds — an issue that sent rates soaring in March 2020.
Others have speculated that China has been paring down its $800 billion in U.S. debt holdings — a move “that would have caused far more havoc than actually occurred,” Sindreau concluded.
To Sindreau, the simplest explanation is that investors are worried that a trade war will upend global trade, which is making them “less confident in holding U.S. financial assets. The ultimate outlet for this is the dollar, which keeps plummeting against major developed currencies, and may have much lower to go.”
