In many respects, confidence is the underpinning of any healthy economy. A lack of confidence from businesses, financial markets and consumers alike can become a vicious cycle that can push an economy into a recession.
After weeks of whipsaw changes in American trade policy and an escalating global trade war, financial markets have cast their vote of no confidence as both the dollar and bond yields have plunged.
American consumers have cast a similar vote, according to the University of Michigan’s consumer sentiment survey released on Friday.
The index in April fell to its lowest level since 2022, plunging to 50.8 from 57.0 in March. At the same time, inflation expectations rose to their highest level since the 1980s. The five- to 10-year inflation expectations rose to the highest level since the 1990s.
Spending plans on all categories dropped on the month as confidence retreated.
We will soon receive more data on business confidence. But given the current level of uncertainty, we should expect a sharp decline in business sentiment—likely resulting in a significant pullback in capital expenditures.
This drop in market confidence is one of the main reasons we believe the probability of a recession in the next 12 months is now much higher than it was only three months ago.
But how will the Federal Reserve react?
As things stand, we believe the Fed will have to prioritize controlling inflation over addressing unemployment, as both inflation and inflation expectations risk spiraling out of control.
Read more of RSM’s insights on the economy and the middle market.
