Consumer Sentiment Plummets to Crisis Levels as Trade Wars and Inflation Unite to Worry Americans

April’s Final University of Michigan Report Reveals Historic Drop, Raising Recession Fears

Lead:
On April 26, 2025, the University of Michigan’s final consumer sentiment index for April was released, revealing a historic collapse in American optimism. The index fell to 52.2, its lowest level since July 2022, with fears of inflation, trade wars, and stagnant wages uniting Democrats and Republicans alike in pessimism.

The Crisis in Consumer Confidence

The final report confirmed a 32.4% year-over-year decline, the steepest drop since July 2022. The expectations sub-index, which gauges future economic outlook, plummeted to 47.3—a level not seen since the 2008 financial crisis.

Key Drivers:
- Trade Policy Uncertainty: President Trump’s April 9 tariff pause failed to reassure consumers, as Beijing retaliated by hiking tariffs to 125%, worsening global supply chain fears.
- Inflation Anxiety: Year-ahead inflation expectations hit 6.5%, the highest since 1981, with two-thirds of consumers predicting rising unemployment—a stark contrast to a labor market that added 250,000 jobs in March.

“This is not just a dip—it’s a systemic unraveling of confidence,” said Joanne Hsu, director of the University of Michigan survey. “Every demographic, from young professionals to retirees, is bracing for worse.”

Inflation Expectations: The Silent Saboteur

The report’s most alarming data point is the 4.4% long-run inflation expectation, up from 4.1% in March. Such figures suggest consumers no longer believe the Federal Reserve can tame prices—a belief that could become self-fulfilling.

“If inflation expectations become un-anchored, the Fed will have to choose between crushing the economy or losing credibility,” warned Dallas Fed President Lorie Logan.

Trade Wars and the Middle Class

Middle-income families bore the brunt of declining expectations, with 78% anticipating weaker income growth—a drop of 12 points from March.

“Wealthier households are insulated by stocks, but middle America is trapped in a wage-inflation squeeze,” said Comerica Bank’s Bill Adams. “This is a recipe for spending cuts.”

The consumer discretionary sector has already felt the pinch. Retail sales slowed by 0.3% in April despite resilient hiring, suggesting frugality is taking hold.

The Fed’s Dilemma

With the U.S. economy growing at below 1% (per New York Fed projections), the Fed faces a no-win scenario. Raising rates further risks a recession, but inaction could cement high inflation.

Conclusion: A Fragile Economy Demands Caution

The April 2025 consumer sentiment report is a red flag for investors. With expectations at crisis lows and inflation fears entrenched, sectors like retail and travel may face headwinds.

Actionable Takeaway:
- Reduce exposure to consumer discretionary stocks (e.g., Walmart, Target) unless they show pricing power.
- Monitor Treasury yields—a sharp rise above 4.5% could signal inflation expectations spiraling out of control.
- Focus on defensive sectors (utilities, healthcare) and quality bonds until trade tensions ease.

The data is clear: until trade policies stabilize and inflation fears subside, American households—and the markets tied to them—are in a holding pattern. The next move rests with policymakers, not consumers.