U.S. consumer confidence dropped sharply in February, marking its largest monthly decline since August 2021, as inflation concerns and uncertainty over trade policy weighed on sentiment. The Conference Board reported Tuesday that its Consumer Confidence Index fell to 98.3, down nearly 7% from January, falling below the Dow Jones estimate of 102.3.
The decline follows a series of warning signs in the economy, including weaker retail sales and persistent inflation, raising concerns that consumer spending-the backbone of the U.S. economy-could slow in the coming months. "Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income," said Stephanie Guichard, the board's senior economist for global indicators.
The Expectations Index, which tracks short-term outlooks for income, business conditions, and employment, fell 9.3 points to 72.9, dipping below the level historically associated with an impending recession for the first time since June 2024. Meanwhile, inflation expectations surged, with consumers anticipating a 6% increase in prices over the next 12 months, up from 5.2% in January and far exceeding the Federal Reserve's 2% target.
The data triggered a mixed reaction in financial markets. The S&P 500 declined 0.6%, while the Nasdaq fell 1.1%. Treasury yields also fell sharply, with the 10-year yield dropping 10 basis points to 4.29%, reflecting investor concerns over slowing growth.
Trade tensions under the Trump administration have added another layer of uncertainty. The president reaffirmed Monday that additional tariffs on Canada and Mexico would take effect in March following a temporary delay in February. Economists warn that such measures could drive up consumer prices at a time when inflation remains stubbornly high.
"This increase likely reflected a mix of factors, including sticky inflation but also the recent jump in prices of key household staples like eggs and the expected impact of tariffs," Guichard said. "There was a sharp increase in the mentions of trade and tariffs, back to a level unseen since 2019."
Consumer spending has already shown signs of strain. Retail sales fell 0.9% in January, the largest drop in a year, after two consecutive months of strong gains. Harsh winter weather was blamed for some of the decline, but economists caution that shifting consumer sentiment could play a bigger role in the months ahead.
"Consumers are increasingly nervous about the unknown impacts from potential tariffs and could pull forward consumer demand as they anticipate higher prices for imports in the near future," said Jeffrey Roach, chief U.S. economist at LPL Financial.
The labor market, which has been a pillar of economic resilience, showed signs of softening. In the Conference Board survey, 33.4% of respondents said jobs were "plentiful," down from 33.9% in January, while 16.3% said positions were "hard to get," up from 14.5% the previous month.
The pessimistic outlook extends beyond the Conference Board's findings. Last week, the University of Michigan's Consumer Sentiment Index also showed a nearly 10% decline in February, while its five-year inflation outlook hit its highest level since 1995.
Federal Reserve officials are closely watching these developments as they weigh future interest rate policy. After three consecutive rate cuts, the Fed held borrowing costs steady at its last meeting, signaling caution about inflation's persistence and the potential economic impact of trade policy.
"Based on all the indicators showing declining consumer and business confidence and sentiment, we are expecting a slowing economy," Carl Weinberg, chief economist at High Frequency Economics, wrote in a note to clients.
