It took no time at all for financial markets to react to the Trump administration’s tariff plan. Global stock prices grappled with the news even before the initial round of tariffs took hold early on April 5. The rebound was equally swift when tariffs were paused on April 9.
But while Wall Street is geared to react swiftly to new information, Main Street is much more deliberative.
Businesses and consumers typically take time to understand what’s happening in the real economy before they act. In the months ahead, they’ll get a better sense of what shifting trade policy might mean for their bottom lines and their pocketbooks. And I’ll be watching for any changes in consumption, hiring, and pay.
Consumption
Consumers, whose spending fuels about two-thirds of U.S. economic output, will give us an early indicator of the effect of tariffs, should they take root. Faced with the risk of higher prices, people might reorient their consumption by speeding up purchases, spending less, or changing what they buy.
During the pandemic, when consumer-facing activity was largely shut down, demand for goods soared as spending on in-person services plummeted. As the economy reopened, consumers shifted their consumption again, increasing spending services and pulling back on goods.
Economic theory teaches—and recent experience demonstrates—that consumption patterns also eventually adjust to price changes.
Because consumers are such a large component of the economy, they have the power to change its course when they swap imports for domestically produced goods, spend more on services and less on goods, or cut back on spending altogether.
And U.S consumers currently have the benefit of higher incomes. Personal incomes rose a hearty 0.8 percent in February from the previous month and were up 4.6 percent year over year, according the Bureau of Economic Analysis.
Inflation has made consumers cautious, sentiment data shows. But rising incomes can help cushion any tariff-driven price increases if they come.
Hiring
It was buried under the financial headlines, but there was good news about the labor market last week.
The ADP National Employment Report found that private employers added 155,000 jobs in March; the Bureau of Labor Statistics nonfarm payroll report also showed robust hiring.
Below the topline number, ADP data revealed a few interesting developments. On the plus side, employers of all sizes were actively hiring last month. On the negative side, job creation was less broad-based across sectors.
Manufacturing was one bright spot. For the second straight month, hiring in manufacturing was solid, bucking a two-year trend of job losses. It’s too soon to know whether these job gains reflect a manufacturing resurgence or are just a bounce in a sector trying to get ahead of tariff-driven costs. The difference is important. Manufacturing accounts for only about a tenth of GDP, but its activity is a barometer of the overall health of the economy.
Hiring in services fared less well. Once a stalwart of the job market, consumer-facing sectors posted much weaker numbers in March than they had over the preceding three months. Leisure and hospitality added 17,000 jobs, down from the sector’s previous three-month average of 47,000.
Offsetting consumer-facing industries, business services added 57,000 jobs, up from the sector’s previous three-month average of 19,000.
If hiring continues to weaken in consumer-facing services, it could bode poorly for the Main Street economy.
Pay
The impact of any new tariffs would take time to materialize, but it’s a good bet that services will be less affected than goods. The 10 percent U.S. tariff originally imposed by the White House specifically targeted goods.
Over the past two years, the cost of housing, haircuts, insurance, and other services have kept inflation above the Federal Reserve’s 2 percent target.
Despite rising prices, year-over-year pay gains continued to slow in March. The pay premium for job-changers was 1.9 percentage points, matching a series low last seen in September. When this premium is small, there’s less incentive for workers to change jobs, which puts downward pressure on pay growth.
And service providers employ roughly 4 out of 5 workers in the United States, according to ADP payroll data. In the services industry, the pay premium for job-changers was 1.6 percent in March; the premium for workers in goods sectors was 3.1 percent. These numbers suggest that service sector pay will continue to have a moderating effect on inflation.
My take
While financial markets react in real time to economic news, Main Street is more likely to take a wait-and-see approach.
When conditions are changing very quickly, it’s easy to grab the first data point you see and use that to guide your outlook for months ahead. Don’t. The economy doesn’t move with the speed of financial markets, and the Main Street climate six months from now could be far removed from current conditions.
As easy as it is to get caught up in headlines, the real economy—how much consumers are spending, whether business is hiring, and what workers are earning—is the best guide for what’s ahead.
The week ahead
Thursday: The Consumer Price Index for March will be watched closely by economists and investors for signs of an uptick in the price of goods, which would signal a big shift away from the usual suspects of inflation, services such as shelter and insurance.
Weekly initial jobless claims, a proxy for layoffs, have hovered near historic lows for the past two years and are one of the most stable indicators of labor market health. Continued placidity would help calm market fears of layoffs.
Friday: Producer prices are expected to edge higher. The Producer Price Index will be a closely watched benchmark in the coming months.
