As the impact of the large-scale tax cut and tax refund policies executed by the Donald Trump administration to boost the economy wanes, reports are mounting that the Middle East-driven oil price shock is rattling the U.S. economy. Experts see a possibility that consumer expenditure, which has supported the U.S. economy, could slow sharply as early as this summer.
U.S. consumption had held up on the back of tax refund effects under President Trump's signature economic policy, the "One Big Beautiful Bill." According to the Financial Times (FT) of the United Kingdom, U.S. households received an average refund of $3,500, and big-box retailers such as Walmart and Target said the inflow of refunds helped defend sales.
However, at the end of Feb., military clashes between Iran and the United States heightened tensions in the Middle East, and the atmosphere shifted rapidly when Iran succeeded in blockading the Strait of Hormuz, the key route for global crude shipments. As international oil prices surged, gasoline and diesel prices in the United States soared 50% in a short period.
According to PNC Bank in the United States, recent gas station card spending by U.S. consumers rose about 40% from the same period a year earlier. As the burden of fuel, a mandatory expense, grows, it means there is less room to spend on other categories.
High oil prices are feeding into higher logistics costs, amplifying broad-based price pressures. In Apr., U.S. grocery prices rose 2.9% from a year earlier, and fruits and vegetables jumped 6.1%. The FT analyzed, "As inflation outpaces wage growth, U.S. workers' real income is declining." The global lead economist at Nation Chits Citigroup noted, "Since mid-last year, wage gains have not kept up with price increases," adding, "On top of the Trump administration's tariff policy, the surge in Middle East-driven raw material prices has compounded the effect."
There is also criticism that the benefits of the tax cut have been concentrated among high earners, further burdening the middle- and low-income groups. According to Bank of America, tax refunds for the top one-third income bracket increased 13% from a year earlier, while the bottom one-third saw a growth rate of only 6%. Mike Reid, chief economist at RBC, said, "Refund benefits were concentrated among the wealthy, who are relatively less affected by price shocks," adding, "The group under the greatest fiscal pressure right now is the middle class."
Market sentiment is also freezing quickly. The University of Michigan's consumer sentiment index, a leading indicator of the U.S. economy, recently fell to a record low. Fifty-seven percent of respondents said, "Personal finances have worsened due to high inflation." Data from the Federal Reserve Bank of New York also show growing warning signs of a consumption slowdown, with delinquency rates on credit cards and auto loans rising in tandem.
The U.S. retail sector is on high alert for the possibility of weaker consumption ahead of the full-fledged summer vacation season. Some companies are said to have entered emergency management, including cutting inventories and trimming expenses. Michael Pearce, chief economist at Oxford Economics, projected, "The consumption slowdown that has emerged after the Iran war could throw cold water on the previously solid U.S. growth trajectory."