Problem for US Fed: Recession warnings are everywhere, except in the data

NEW YORK - Americans are spending less at McDonald’s. Fewer container ships are expected at the Port of Los Angeles. Procter & Gamble is raising prices.

Evidence for the economic impact of US President Donald Trump’s trade wars is everywhere – except, for the most part, in economic data itself. Consumer spending has not fallen. Layoffs have not risen. Businesses have not stopped investing in equipment or buying supplies.

Economists say it is a matter of time before

the impact of tariffs

and the uncertainty that Mr Trump’s on-again, off-again approach to trade policy has created begin to show up in the hard data.

But until then, they are left sifting through crumbs of evidence that would not get a second glance in more normal times: Customs revenue, hotel bookings in Las Vegas, freight shipments by truck and rail.

Among those hunting for titbits of evidence are officials at the US Federal Reserve, who are trying to figure out how to set monetary policy in an environment where tariff policy can shift multiple times between meetings.

Policymakers

held interest rates steady on May 7,

in part because of that uncertainty. But they will be watching for signs that the economy is changing direction faster than the usual indicators can capture.

The situation is reminiscent of the early days of the Covid-19 pandemic, when economists scoured the internet for alternative measures.

During the pandemic, however, economists mostly agreed about where to look for evidence and what the likely effects would be. This time, there is more disagreement. Will the tariffs manifest mostly in higher prices or product shortages? Will consumers pull back spending, leading to layoffs? Or will layoffs come first – perhaps in manufacturing and shipping – with spending to follow as workers lose their income?

“In times when there’s a lot of volatility in the economy, and you’re waiting for the data to catch up with what’s actually going on – because not only does it take time for consumer behaviour to change, but also we see this in the data a month or more after it happened – you want to watch these anecdotes to get a sense of where things might be headed,” said Citigroup chief US economist Andrew Hollenhorst.

Tariffs have already shown up in the economic data in one way: Consumers and businesses have raced to import goods before new duties take effect. That has led to a surge in the trade deficit, which hit a record US$140 billion (S$181 billion) in March.

But economists disagree about what will happen next. Some argue that as tariffs push up prices, consumers will reduce their purchases, ultimately leading to layoffs and a recession.

Others argue that consumers, especially more affluent ones, are in strong enough financial shape that they will be able to keep spending, allowing businesses to pass on their higher costs and pushing up inflation.

And of course, it is possible that Mr Trump will roll back tariffs or that they will prove less damaging than many economists expect.

Measures of consumer sentiment have plummeted since Mr Trump took office, suggesting that shoppers are in little mood to stomach higher prices. But economists have grown more sceptical of such measures in recent years after they failed to predict consumer behaviour during and after the pandemic.

“What we learnt over the pandemic is that vibes can look bad, and yet consumers will still spend,” said Mr Ernie Tedeschi, director of economics at the Budget Lab at Yale.

Hence the focus on anecdotes, which forecasters hope might provide an early sign of which direction the economy is headed.

The trouble is that anecdotes, too, are sending mixed messages. Airline executives have been issuing dire warnings. Southwest Airlines’ chief executive recently said a recession had already begun in his industry, yet hotel occupancy rates have held up so far.

McDonald’s and Chipotle reported declining sales last quarter, but Yum Brands – owner of Pizza Hut, KFC and Taco Bell – saw sales rise despite what its chief financial officer called a “complex consumer environment”. Companies have told varying stories about when and to what extent they will pass on the cost of tariffs to consumers.

Anecdotes and alternative data sources can also be easy to misinterpret. When visits from international tourists plummeted in March from a year earlier, many observers took it as a sign that foreigners were avoiding the United States because of Mr Trump’s policies. But that drop now appears to have been mostly the result of a late Easter: Tourism rebounded in April.

The conflicting signals pose a problem for the Fed as it weighs when to cut interest rates. The central bank is attuned to mounting concerns that the economy is on the cusp of slowing dramatically under the weight of Mr Trump’s tariffs.

But the risk that they could also unleash a wave of higher consumer prices at a time when inflation is stubbornly sticky has raised the bar for it to take action.

As a result, the Fed will likely need more than just anecdotes. Officials will at least need to see tangible signs that layoffs are on the horizon.

Spiking unemployment or slowing consumer spending would give them even greater assurance that they can lower interest rates without worrying about inflation reigniting. But waiting for either to happen raises the risk that they will be late and forced to do more to shore up the economy. NYTIMES