Worries mount that Trump agenda is testing economy’s resilience

The U.S. economy has proved pessimists wrong so many times, it’s tempting to think nothing can stop it.

President Trump’s first-month policy blitz is putting that resilience to the test.

It’s far too early to say if cracks are forming in the overall economy, which grew at a healthy 2.3% annual clip in the fourth quarter. The unemployment rate dipped to 4% in January, low by historical standards.

But consumer spending, which accounts for more than two-thirds of demand, declined 0.2% in January, the Commerce Department reported Friday, instead of rising as economists expected. It was the largest monthly drop in four years.

Meanwhile, the Conference Board’s consumer confidence index posted its largest monthly decline in February since 2021, and consumer expectations of inflation have risen. An index of global economic policy uncertainty based partly on news articles and economic forecasts has topped its pandemic-era record.

The S&P 500, which rose more than 6% between Election Day and Feb. 19, has since fallen 3.1%. The yield on 10-year Treasury notes has tumbled from 4.79% on Jan. 14 to 4.23% Friday. It is now below three-month Treasury bill rates. Bond yields reflect expectations of growth and Federal Reserve interest-rate actions. When they drop below short-term rates, a configuration called an “inverted yield curve,” it tends to foreshadow softer growth.

Economists refer to confidence surveys and financial indicators as “soft” data. They are notoriously volatile, influenced by news, and often poor predictors of real economic activity.

Most “hard” data—on income, the labor market, and output—generally point to an economy chugging along. The drop in consumer spending in January may have owed partly to cold weather in the south and wildfires in Los Angeles.

Moreover, Trump may not follow through on all of his tariff threats.

“We suspect that bark and bite will be separated by some distance,” said Carl Tannenbaum, chief economist at Northern Trust. Meanwhile, Congress appears poised to increase the budget deficit, which would boost growth. “We are certainly watching the impact of selected government cost cuts on consumption, but our expectation [is] that solid labor market performance will continue to underpin household spending.”

One sign of softening in the hard data: Weekly claims for initial jobless benefits rose last week to 242,000 from 220,000. While that isn’t even the highest of the past six months, claims in Washington, D.C., were roughly four times higher than this time last year, likely evidence of Trump’s layoffs of government employees and belt-tightening by contractors.

The rapid-fire pace of Trump’s policy changes is generating policy uncertainty that could in and of itself weigh on businesses and household spending.

“We’re all sitting here trying to filter through the noise to the economic reality,” said KPMG chief economist Diane Swonk. “But the noise itself has its own economic consequences.”

Swonk sees rising chances of a recession later this year in part because of the sequencing of Trump’s agenda.

The pieces that have proved quickest to enact—raising tariffs, curbing immigration, cutting federal workers and contracts—all tend to drag on short-term growth. The tax cuts he and congressional Republicans are pursuing might not take effect until next year.

“There has been no progress on the ‘positives’ for growth—tax cuts and deregulation,” said James Knightley, chief economist at ING Financial Markets. “Instead the administration has been focusing on policies that yield ‘negatives.’”

The downturn in the soft data may partly be a reversal of a postelection sugar high. Goldman Sachs has left its estimated probability of a recession in the next 12 months at 15%, chief economist Jan Hatzius said.

There is also some dissonance between surveys. The Conference Board said chief executives polled between late January and early February reported their highest confidence in three years, while S&P Global said purchasing managers surveyed in mid-February expressed sharply lower optimism about the coming year.

But Trump’s tariff threats also appear to be driving consumers’ inflation expectations higher. That phenomenon is harder to dismiss, as it has appeared in multiple surveys for consecutive months.

Rising inflation expectations are a potential problem because economists think they can become self-fulfilling and make the Federal Reserve hesitant to lower interest rates, even if economic momentum wanes.

“With inflation just recently at a 40-year high, now is not the time to let down our guard,” said Jeff Schmid, president of the Kansas City Fed, in a speech Thursday. Noting concern that business uncertainty could weigh on economic activity, he added: “The Fed could have to balance inflation risks against growth concerns.”

Construction, held back by high interest rates, is highly exposed to Trump’s immigration crackdown. Manufacturing output, which has been trending down since mid-2022, could be seriously disrupted by another trade war.

Trump said Thursday the U.S. plans to impose an additional 10% tariff on imports from China next week, on top of a similar increase in February. He also said he plans to move forward with 25% tariffs on Canada and Mexico.

“That could be a major hit,” said Gregory Daco, chief economist at EY-Parthenon. “And it’s not true that you can offset that with domestic production overnight. It takes years to build factories.”

Daco sees the probability of a recession in the next 12 months at 35% to 40%, up about 5 percentage points from the start of the year.

Meanwhile, some signs of strong demand may be less reassuring on closer examination. Excluding aircraft and defense-related items, new orders for capital goods rose 0.8% in January from December, the Commerce Department said Thursday. Economists say that may reflect companies front-loading orders to beat tariffs. A similar hint of stockpiling comes from new data on the trade deficit in goods, which ballooned to a record $153.3 billion in January, according to the Commerce Department.

As recently as early January, economists surveyed by The Wall Street Journal expected GDP to expand at an annualized rate of 2.2% in the first quarter from the end of 2024. Several of those economists said their forecasts haven’t changed much in recent weeks.

But a wider trade deficit would subtract from GDP. A Federal Reserve Bank of Atlanta model that continuously updates estimated growth with new data lowered projected growth in the current quarter to a contraction of 1.5% from growth of 2.3%. On Friday economists at Piper Sandler downgraded their first-quarter GDP forecast to a 2% annualized contraction rather than 2% growth.

“Is this the beginning of a recession? We’re not calling it that,” said Piper Sandler chief economist Nancy Lazar. “But this economic uncertainty is creating a weaker backdrop.”

Write to Paul Kiernan at paul.kiernan@wsj.com