WASHINGTON -- Ongoing tariff threats from Washington and potentially sweeping government job cuts darkened consumers' mood and may be weighing on an otherwise mostly healthy economy.
Data released Friday showed that consumers slashed their spending by the most since February 2021, even as their incomes rose. On a positive note, inflation cooled, but President Donald Trump's threats to impose large import taxes on Canada, Mexico, and China -- the United States' top trading partners -- likely will push prices higher, economists say. Some companies already plan to raise prices in response.
Americans cut their spending by 0.2% in January from the prior month, the Commerce Department said Friday, likely in part because of unseasonably cold weather. Yet the retreat may hint at more caution by consumers amid rising economic uncertainty.
"The roller coaster of news headlines emanating from Washington D.C. is likely going to push businesses to the sidelines for a time and even appears to be impacting consumers," Stephen Stanley, chief U.S. economist at Santander, said in an email.
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The reduction in consumer spending -- coupled with a surge of imports in January, also reported Friday, as companies likely sought to beat tariffs -- led the Federal Reserve's Atlanta branch to project the economy would shrink 1.5% at an annual rate in the January-March quarter, a sharp slowdown from the 2.3% growth in the final three months of 2024.
Most analysts still expect the economy to expand in the first quarter but at a much slower pace. Stanley lowered his estimate for first-quarter growth to just 1.25%, from about 2.25%.
Inflation declined to 2.5% in January compared with a year earlier, down from 2.6% in December, the Commerce Department said Friday. Excluding the volatile food and energy categories, core prices dropped to 2.6%, the lowest since June, from 2.9%.
Economists noted inflation likely would keep cooling but the progress could be upended by tariffs. Trump said Thursday he would impose 25% duties on imports from Canada and Mexico, though just 10% on oil from Canada. He also said he wanted to double the current tariff on imports from China to 20%.
Trump also calls for widespread layoffs of federal workers, which could cause hundreds of thousands of job losses and potentially lift the unemployment rate.
Randy Carr, CEO of World Emblem, says the tariffs, if imposed, will force him to raise prices and cut jobs. World Emblem makes patches, labels and badges for companies, universities and law enforcement agencies.
The firm has factories in Georgia and California but makes about 60% of its products in Mexico. Carr said if the 25% import taxes are imposed, he expects to raise prices by 5% to 10%. He also plans to cut "a handful" of jobs among the 500 workers his company has in the United States to help absorb the rest of the costs.
Carr said he would also cancel about $9 million in planned investments in artificial intelligence and online commerce.
"It's so annoying," he said. "Right now you have this volatility, and so you really can't plan anything. You just got to wait until we get a final verdict from from the administration. It's definitely not punishing Mexico, it's punishing us."
An "economic blackout" promoted on social media was underway Friday. A fledgling activist group encouraged U.S. residents refrain from spending for 24 hours as an act of resistance against what the group's founder described as the malign influence of billionaires, big corporations and both major political parties on the lives of working Americans.
There was no clear indication of how many people took part or whether national retailers and restaurant chains noticed any effect from the grassroots protest.
The inflation-fighters at the Federal Reserve said in January they planned to keep their key short-term interest rate on hold at 4.3% to slow borrowing and spending enough to lower inflation back to their 2% target. The Fed's elevated rate contributed to higher borrowing costs for mortgages, auto loans and credit cards.
The Fed prefers Friday's inflation measure to the more widely known consumer price index, which rose for the fourth straight month in January to 3%. Friday's gauge calculates inflation slightly differently: For example, it puts less weight on the costs of housing and used cars.
Inflation spiked in 2022 to its highest level in four decades, propelling Trump back to the White House and leading the Fed to rapidly raise interest rates to tame prices. It since fell from a peak of 7.2%, and some economists expect it could fall closer to 2% in coming months, absent tariffs.
"The inflation data could be distorted higher at exactly the time when the Fed would otherwise be in a position to declare a win," Stanley said.
One other bright spot in the report was that incomes jumped 0.9% in January from December, fueled in part by a large annual cost of living adjustment for Social Security beneficiaries.
Yet Americans spent less anyway, particularly on cars, where purchases fell sharply. Some consumers could be trying to save money after splurging during the holiday shopping season. Credit card debt surged in December, economists noted.
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