The tariff pressure is hiding in plain sight, Wells Fargo sa

[cng]

The tariff pressure is hiding in plain sight, Wells Fargo says

Earlier talks suggested that President Donald Trump's tariffs had limited impact on household spending, however, there is plenty of emerging evidence that is now showing otherwise, according to Wells Fargo.

Wells Fargo pointed out that the initial Q1 estimates of robust consumer resilience have been markedly revised downwards. Furthermore, real personal consumption expenditure also rose only 0.5%, with discretionary spending falling 0.8%, as consumers seem to be tightening their purse strings.

“Even while it is an under-appreciated fact that consumer spending has been revised lower, one of the top questions we get these days involves when we will see the impact of tariffs on consumer spending and in the retail sector. The time is now,” Tim Quinlan, senior economist, said.

Some key tariff-linked items have seen a measurable pull-forward prior to the Liberation Day announcements, followed by an air pocket in the months since, said Quinlan, adding, "Stockpiling by retailers has mitigated the inflation impact for many goods items. When pre-tariff inventories have been drawn down, the cost pass-through will be stark."

Wells Fargo said they still estimate discretionary spending to be up close to 1.5% over the past year through May, but that will still be a full percent lower than its average run-rate last year.

"Some of what looks like 'strength' here could simply be a function of pulled-forward demand that lifted spending on some key goods categories late last year before higher tariffs potentially made them more expensive. In short, discretionary goods spending has held up," Quinlan said.

Households are spending 0.9% more to go out to eat as compared to a year ago, while recreational services are only up 0.2% year-on-year, the note stated.

Transportation expenses were down by 1.1% over the past year.

"Within transportation, the places where households are cutting back most include auto maintenance, taxi & ride-sharing, and the biggest decline of all: air travel, down 4.7% over the past year. The fact that households are putting off auto repair, not taking an Uber, and cutting back or eliminating air travel points to stretched household budgets," Quinlan said.

Wells Fargo noted that consumers pulled forward some purchases ahead of the tariffs and accelerated some big purchase spending, such as cars and appliances, in anticipation of higher prices.

"Consumers are fearful of higher inflation to come. But while we’ve seen some isolated potential-tariff effects like higher appliance prices, auto prices remain tame and overall inflation remains in check," Quinlan said.

Quinlan added that one of the major reasons we have seen price pass-through is because of inventories.

"There is also a repeated refrain that tariffs are not having an impact, and that assessment misses the mark, in our view. Consumer spending is simply not as sturdy as we previously thought it was or even as it was first reported to be," Quinlan said.