Americans are waking up to the fallout from Trump’s tariffs

As U.S. President Donald Trump looks poised to follow through on his tariff threats, American companies, consumers and investors are finally getting nervous.

U.S. stock markets sold off sharply on Monday when the President said that he would proceed with 25-per-cent tariffs on Canada and Mexico on Tuesday. The S&P 500 index ended down 1.8 per cent while the Nasdaq Composite was down 2.6 per cent.

Meanwhile, a batch of recent surveys have shown a sharp drop in American consumer confidence, a rise in inflation expectations and a scramble by U.S. businesses to prepare for supply chain disruptions and higher input costs.

Mr. Trump’s threat to blow up decades of continental economic integration was initially met by a shrug from U.S. investors and businesses, who seem to have doubted his willingness to follow through or focused on the potential benefits of lower corporate taxes and deregulation promised by the new administration. But this optimism has faded as the President has barrelled toward a trade war.

“I think people expected that deregulation and tax policy would be concurrent with tariffs, but really tariffs are dominating now and everybody’s recognizing that this is what’s going to hit us first, and that’s going to hit our bottom line,” Ali Jaffery, senior economist at Canadian Imperial Bank of Commerce, said in an interview.

After surging in the wake of Mr. Trump’s election, the big U.S. stock indexes have largely fallen back to where they were in early November. Some economic indicators are starting to turn south, although others show that the U.S. economy remains strong.

The latest warning sign came from the monthly ISM Manufacturing Index report, published Monday, which captures U.S. manufacturing activity and the outlook for the sector. The ISM index declined slightly in February while the survey captured a shift in mood.

“Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery stoppages and manufacturing inventory impacts. Although tariffs do not go into force until mid-March, spot commodity prices have already risen about 20 percent,” Timothy Fiore, chair of the ISM manufacturing business survey committee, said in a news release.

Representatives from almost every manufacturing sector quoted in the ISM report said they were bracing for the impact of tariffs or already feeling their negative effects. Customers are pausing new orders, suppliers are increasing prices, and the manufacturers themselves are holding off investment plans, the report said.

Similar concerns are cropping up in U.S. earnings calls, although many companies are still playing down the potential impact of tariffs on their bottom lines.

Matthew Wagner, president of Camping World Holdings Inc., which sells recreational vehicles, said on an earnings call last week that he expects prices to rise.

“The manufacturers will probably be looking at raising prices on new-model-year changeover, which should be about June 1, if not perhaps even raising prices in anticipation of that, just because someone is going to ultimately have to endure whatever these tariff price increases could be,” Mr. Wagner said.

Edward Rosenfeld, chief executive of shoe retailer Steve Madden, warned on a Feb. 26 earnings call that profit margins could be crimped by U.S. tariffs on China, as input costs rise while the company won’t be able to pass them along entirely.

“Obviously, we have a consumer who has been exhausted by price increases over the last several years, and so what I don’t think we can do is just raise prices across the board or take the exact same styles and just raise them $10. But we do need to get some price increases pushed through here to mitigate some of the impact of tariffs,” Mr. Rosenfeld said.

Indeed, consumers appear to be getting worried about the inflationary impact of tariffs. A Conference Board survey of U.S. consumers, published last week, showed the largest monthly decline in consumer confidence since August, 2021, alongside a steep rise in inflation expectations. The Conference Board report noted a sharp increase in people mentioning tariffs and said that “comments on the current Administration and its policies dominated the responses.”

Jennifer Lee, senior economist at Bank of Montreal, noted in an interview that concerns about tariffs are being layered on top of other high-profile inflationary worries. The cost of eggs, in particular, has shot up as avian flu has killed millions of chickens.

“I think corporate America is just sort of waiting to see when it actually kicks in, if it does kick in and how long it’s going to kick in for. But I think more of the concern is coming from the consumer front because they are already facing higher prices, not just at the pump, but also at the grocery stores,” she said.

The latest inflation data, published Friday, showed a slight cooling in the U.S. Federal Reserve’s preferred Personal Consumption Expenditures price index – to an annual rate of 2.5 per cent in January from 2.6 per cent in December. It also showed an unexpectedly large pullback in consumer spending.

Mr. Jaffery of CIBC said there’s a great deal of uncertainty about what will happen next, and the data for early 2025 are just starting to trickle out.

“I think we’re going to start to see that uncertainty and the impact of tariffs start to show up fairly gradually in the U.S. data,” he said.

“The biggest thing to look for is Friday’s [jobs report]. I would expect that tariff uncertainty to weigh on manufacturing employment and the same thing with government hiring obviously because of the efforts of DOGE in the U.S.,” he said, referring to the effort led by the President’s ally Elon Musk to slash the federal bureaucracy.