Trump’s Presidency Hits a Snag: U.S. Markets Plummet Amid Economic Concerns

Consumer Confidence Dips as Service Sector Shows Signs of Contraction

The American economy is facing troubling signs just one month into Donald Trump's second administration. The service sector, which constitutes 80% of the U.S. GDP, has entered a contraction phase for the first time in 25 months, sending shockwaves through the financial markets. This shift comes as consumer confidence declines sharply, sparking fears of inflation and economic slowdown.

According to the latest report from S&P Global, the Purchasing Managers’ Index (PMI) for the services sector fell to 49.7 this month, marking the lowest point since January 2023. This drop below the neutral threshold of 50 indicates that the service industry, which includes key sectors such as finance, retail, logistics, healthcare, and education, is experiencing a downturn. In contrast, last month, the PMI stood at 52.9, hinting at previous stability.

Concerns over Trump's economic policies are contributing to the declining consumer sentiment. With the administration ramping up tariffs and immigration policies, apprehension about a slowing economy is becoming more pronounced. Chris Williamson, chief business economist at S&P Global, noted that the initial optimism seen in U.S. businesses at the start of the year has evaporated, as companies report widespread worries about government policies affecting everything from spending cuts to geopolitical issues.

The University of Michigan's consumer sentiment index also recorded a significant drop, with the finalized figure for this month falling to 64.7, a decrease of nearly 10% from the previous month. This represents the lowest consumer confidence level since November 2023, indicating that households are becoming increasingly hesitant to spend.

Joanne Hsu, director of the University of Michigan's survey, highlighted that the decline in consumer confidence is pervasive across all demographics, with all five components of the index worsening. Particularly alarming is the sharp 19% drop in the index measuring conditions for purchasing durable goods, largely driven by concerns over rising prices due to increased tariffs.

Inflation expectations among U.S. consumers have also surged. The one-year inflation expectation has risen to 4.3%, the highest since November 2023, while the five-year inflation expectation reached 3.3%, the highest level recorded since 1995. Neil Dutta, head of economic analysis at Renaissance Macro Research, emphasized the critical role of fears regarding Trump's tariff policies, which have pushed long-term inflation expectations to their highest point in three decades.

The effects of tariffs on consumers are becoming increasingly evident, as highlighted by Jamie Cox, managing partner at Harris Financial Group. He noted that while tariffs might not be implemented immediately, consumers are adjusting their purchasing behaviors in anticipation of these potential price hikes.

The impact of deteriorating consumer confidence is also visible in the housing market. The National Association of Realtors (NAR) reported that existing home sales in January, seasonally adjusted, decreased by 4.9% compared to the previous month, totaling an annualized rate of 4.08 million homes.

There are growing concerns regarding the overall momentum of the economy. Although the preliminary manufacturing PMI for February showed an uptick to 51.6, the highest in eight months, analysts suggest this increase is due to companies stockpiling inventory in response to expected tariff and raw material price hikes.

The financial markets have reacted swiftly to these developments, with the Dow Jones Industrial Average plummeting by 1.69% (748.63 points) to close at 43,428.02, marking its largest decline of the year. Over the past two days, the Dow has dropped nearly 1,200 points. The S&P 500 index fell 1.71% (104.39 points) to 6,013.13, experiencing the most significant drop since December 18, when the Federal Reserve indicated a slower pace of interest rate cuts.

Similarly, the tech-heavy Nasdaq Composite Index fell by 2.20% (438.36 points), closing at 19,524.13, marking its largest drop since January 27. The initial optimism surrounding Trump’s presidency, which had led to record highs in stock indices due to expectations of deregulation, has now shifted to fears of inflation and low growth driven by mounting tariffs and immigration policies.

Reuters reported that despite Trump's pro-growth agenda, the specter of trade wars is casting a long shadow over the U.S. economy, reigniting concerns about stagflation—a scenario where the economy stagnates while prices continue to rise. Since experiencing stagflation during the 1970s oil crisis, the U.S. has not encountered simultaneous economic stagnation and inflation for the past 50 years.