What we expected for April retail sales has now materialized: a sharp turn in consumer spending at retail stores and restaurants, following months of stockpiling ahead of tariffs, according to government data released Thursday.
In a separate report from the Federal Reserve, manufacturing output dropped for the first time since October, falling by 0.4% in April.
Even though prices have not risen as sharply as anticipated, falling confidence and weakened expectations have pushed consumers into a more cautious stance—particularly when it comes to durable goods, which are sensitive to tariffs and income volatility.
Within the retail sales report, the decline in the control group—used as a proxy for goods consumption within GDP—is a worrying signal.
But retail sales were not the only dataset pointing to falling demand. The unexpected monthly drop in producer prices also signaled weakening spending—particularly for discretionary services like air travel, financial services and trade services, which act as a proxy for retail and wholesale margins.
The wide gap between the consumer price index and the producer price index suggests that in April businesses were able to lean on existing inventories to shield consumers from rising input costs.
One result for businesses, though, were compressed margins, and that may not last much longer. Walmart said on Thursday that it planned to hike prices to deal with rising tariffs later this month.
Read more of RSM’s insights on the economy and the middle market.
We are now witnessing the first-order effects of tariffs on the economy, through reduced spending. The second-order impact—on prices—will most likely emerge in the coming months, putting additional pressure on demand.
The takeaway
While a recession is no longer our base case over the next 12 months because of the recent reduction in tariffs, the likelihood has increased that the U.S. economy will experience several quarters of sluggish growth, with inflation remaining high enough to prevent the Fed from cutting interest rates.
