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The Week Ahead: Tariffs Become a Consumer Concern

If anyone thinks the consumer wouldn’t be bothered by slight increases in pricing, new data suggests otherwise. And the roller coaster ride in the equities market over tariff and trade fears isn’t helping one bit.

Tariffs and the consumer: On Friday, a preliminary reading from the University of Michigan Sentiment Survey had the index dropping 92.1 from 98.4 in July. The expectations component of the index led the decline, which fell 8.2 points.

According to Scott Hoyt, an economist at Moody’s Analytics, “The flare-up in the trade war and the drop in the stock market undermined consumer confidence in early August.”

He noted that the decline in the expectations component was the biggest drop since December 2012. The economist said that the recent drop in sentiment suggests that “consumers may be paying more attention as back-to-school and holiday shopping seasons approach.” He added that keeping a close eye on the consumer bears watching as a “sustained drop in confidence could set off alarms.”

That said, Moody’s Hoyt also noted that the still relatively high confidence level–by historical standards–is in contrast to the attitudes in the business sector. “Global businesses are anxious, worried over President Trump’s trade war with China,” he concluded.

The report from the University of Michigan cited increased tariffs as the reason for the decrease, with 33 percent of respondents citing tariffs as the reason for many of their responses. According to Richard Curtin, surveys of consumers chief economist at the University of Michigan, said, “Monetary and trade policies have heightened consumer uncertainty…. Although the announced delay until Christmas postpones its negative impact on consumer prices, it still raises concerns about future price increases.”

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Curtin said that the recent Federal Reserve cut in interest rates–the first in a decade–has increased apprehensions about a possible recession. “It is likely that  consumers will reduce their pace of spending while keeping the economy out of a recession at least through mid 2020,” the economist concluded.

And Sarah House, senior economist at Wells Fargo Securities, noted that tariffs are becoming evident in consumer price inflation. She noted that consumer prices heated up in July, rising 0.3 percent. The economist also noted that there are signs that upping the tariffs on $250 billion of Chinese imports to 25 percent from 10 percent this summer is “beginning to feed through to core goods and drive consumer prices higher.”

For now, the next Tranche 4 group of Chinese imports to see a 10 percent increase on goods that have never been taxed before will begin on Sept. 1, while others are delayed until Dec. 15. And while much attention has been spent this week on the delay and how it will help consumers with their holiday shopping, the fact is that many apparel and footwear items will see tariffs applied beginning on Sept. 1.

Earnings: It’s still earnings season for many retailers. On Wednesday, Macy’s Inc. chief executive officer Jeff Gennette said his company tested some slight increases in certain categories and the retailer found that the “customer doesn’t have much appetite for price increases.” Macy’s said that based on what it learned from testing price increases, it wasn’t planning on broadly raising prices to counter any tariff increases.

Walmart Inc.’s chief financial officer Brett Biggs on Thursday told Wall Street investors that the discounter “has been able to thoughtfully manage pricing and margins with both our customers and shareholders in mind.”

Coming up, Kohl’s Corp. and Urban Outfitters Inc. will report on Tuesday, while Target Corp., Nordstrom Inc. and L Brands Inc. will report on Wednesday. Foot Locker Inc., Gap Inc. and Ross Stores Inc. follow on Thursday.

Wall Street will be on the alert for what retail executives say on how they plan to deal with the tariff hikes, and what the impact may be on future earnings results.