U.S. trade war with China is torpedoing consumer confidence

• A closely watched index of consumer confidence dropped last month to its lowest level since January, with a third of respondents citing the latest proposed round of U.S. tariffs on China as a concern.
• Consumer spending accounts for roughly 70% of economic activity in the U.S., so confidence indexes are watched closely by investors to assess whether shoppers might pull back.
  
• The Fed's decision last month to cut interest rates for the first time since 2008 also sent a signal to consumers that they might need to pull back on spending because of a possible recession.

Americans have proved hardy despite deteriorating trade relations between the U.S. and China, continuing to spend freely even as the prospects for a deal fade. But a key gauge of how consumers are feeling suggest they're finally starting to get nervous.

Consumer confidence last month dipped to its lowest level since January, according to the University of Michigan's sentiment index, which investors watch closely as a signal of where the economy is headed. The reason: Respondents to the survey fear that U.S. tariffs set to take effect later this year could mean higher costs on a range of products, and perhaps push the economy toward a recession.

The initial index reading for August slumped to 92.1 from 98.4 the previous month — that's the second-lowest level since President Trump took office in 2017.

Consumer confidence polls reflect whether people are feeling optimistic about the economy and their own financial prospects. Because consumer spending accounts for roughly 70% of economic activity in the U.S., such polls are tracked on Wall Street to assess whether shoppers might pull back.

Although "consumption has been unusually strong in recent months, there is no guarantee that trend will continue,"  Paul Ashworth, chief U.S. economist with Capital Economics, said in a report.

August's sharp dip reflects "consumer uncertainty" sparked partly by the White House's trade war with China, including Mr. Trump's threat earlier this month to further raise tariffs on Chinese imports, said Richard Curtin, chief economist for the University of Michigan Surveys of Consumers.

"Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports, spontaneously cited by 33% of all consumers in early August, barely below the recent peak of 37%," he noted. 

The U.S. said this week that it would delay imposing a 10% tariff on some Chinese imports, including smartphones, video consoles, and some types of toys, shoes and clothes, until Dec. 15 — an apparent effort to avoid raising costs for popular consumer goods ahead of the key back-to-school and holiday shopping seasons.

But the Trump administration is proceeding with levies on more than $100 billion in Chinese products starting next month, fueling anxiety about the economy and whipsawing financial markets. Earlier this year, investors were banking that Mr. Trump and Chinese leader Xi Jinping would strike a deal. But those hopes have been dashed, and many experts now predict that the trade war is likely to persist beyond next year's presidential election.

Rather than shore up consumer confidence, meanwhile, a move by the Federal Reserve last month to trim interest rates for the first time since the Great Recession seems to have had the opposite effect. Americans interpreted the rate cut as an indication that the economy is weakening and could tumble into recession, the University of Michigan said.

"Consumers concluded, following the Fed's lead, that they may need to reduce spending in anticipation of a potential recession," Curtin said. "Falling interest rates have long been associated with the start of recessions."

Trump's favorite statistic

Mr. Trump often cites consumer confidence data as evidence that his economic policies are providing lifting Americans. Yet economists note that such metrics alone aren't especially predictive. For instance, Americans felt bullish in 2000 — just before the dot-com crash and recession.

And historically, this August's consumer confidence number is still relatively high, wrote Jim Baird, chief investment officer for Plante Moran Financial Advisors, in a research note.

"The index remains well above its long-term average and generally indicative of a reasonably optimistic consumer sector," Baird noted. "Most data still points to an economy that is slowing, but still growing. A prolonged downturn in consumer sentiment would present an additional challenge to growth."