NEW YORK CITY — The U.S. must face up to “a slowing economy in the face of a very large tariff shock,” so says Matthew Luzzetti, chief U.S. economist at Deutsche Bank, though he notes aggregate consumer fundamentals remain strong, a positive for the hospitality industry.
Speaking at the NYU International Hospitality Investment Forum yesterday, Luzzetti noted that consumers had faced several shocks in recent years - from the largest tightening cycle in Federal Bank history in 2022 to another banking sector crisis in March 2023 - before being hit with President Trump’s tariff announcements during April’s “Liberation Day” this year.
Consumer Spending
Despite this, consumers had responded well overall, with the service sector remaining stable and the sale of goods actually increasing, and household wealth and savings levels remaining strong
Positively, he noted: “Even if income growth were to slow, households have as much as a buffer as they have had over the last three to five years,” adding that with the rate of household net worth to income currently standing at near record levels of around 800 per cent, there are reasons for optimism.
However, Luzzetti warned that the picture was a little different when considering the outlook for middle- and lower-income households.
“There are some strains. Delinquency rates have risen on credit card balances, auto loans and student loans, with the latter factor casting a greater shadow in the last 12 months.
He explained: “For the most part, post-pandemic, you were not put into collection for missing student loan payments. That has changed. Some $1.6 trillion must now be paid or people will go into delinquency. For certain households, this is a negative when looking at the outlook for spending.”
Tariffs
Another issue is the potential impact of Trump’s “Big Beautiful Bill” for lower earners. While this hasn’t fully taken effect yet, historic cuts in programmes such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP) could mean a 2 percent reduction in the bottom quintile’s ability to consume
Looking on the brighter side, Luzzetti noted that the headline tariffs – announced by Trump on 2 April – had since been modified.
“Tariffs rising to their highest levels in decades lifts inflation and dents real incomes but sequential rollbacks on tariffs has improved the outlook. While the average tariff on Liberation Day was around 30 percent, they are now an average of 17 percent,” he added, explaining however that almost daily policy adjustments by Trump – most notably towards Europe and concerning aluminium and steel tariffs in the last week – were adding to the uncertainty.
“We are still experiencing the largest check to trade in 100 years,” he added. This is expected to continue to impact core inflation and affect the dollar.
He noted that while tariffs usually strengthen a currency, the opposite seems to have happened in the U.S., as he suggested that tariffs alone could be responsible for an additional 1 percent of inflation this year.
And while there’s a lot of speculation about international visitor arrivals to the U.S. falling this year, the data still seems largely inconclusive.
Looking Ahead
Yet Luzzetti noted that a significant portion of the population remained optimistic. Citing University of Michigan data, he noted links to positivity about the economy when a Republican sat in the Oval Office.
Looking forward, he predicted that Federal Bank cuts to interest rates would proceed over the next year with the 10-year US Treasury note yield remaining at around 4.5 percent. Overseas funds might continue to taper allocations to US assets.
However, the real risk lies in the stability of the labour market. While the employment story had been stable to date, he warned of the “fragile equilibrium of low hiring and firing” which could “break down with a rise in layoffs,” noting that the demand for new workers has slowed considerably. However, he expressed hoped that the fiscal package, in the near term, should support the economy.
In a nutshell, the view is cautiously optimistic. In the face of global tensions and tariff talks, while consumer spending growth is expected to slow next year, a recession may be avoided.