Consumer business conditions potentially clouded by policy changes

Consumer businesses began the year with a lot to like, with the current U.S. economy performing well and consumers continuing to spend over the last year, even with what we expected was a short-lived decline in January. However, potential policy changes have created uncertainty for businesses, undermining their confidence to pursue cost savings through long-term capital investments and supply contracts. Consumer sentiment fell in March to its lowest level since early 2023.

Current environment

The U.S. economy continues to lead the world with its gross income per capita at $80,450 in 2023, higher than any other country according to the most recent year of data available, according to the World Bank. Because of this strength in purchasing power businesses worldwide want to sell in the U.S. market.

The core consumer price index, which excludes food and energy costs, rose sharply in January—0.4% month over month, and 0.2% in February, a 3.1% increase year over year, according to the Bureau of Labor Statistics.

Fourth-quarter real gross domestic product grew 2.3% from the preceding quarter and 2.5% year over year, according to the Federal Reserve Bank of St. Louis, indicating a healthy economy. In addition, unemployment remains low at  4.1%.

With a period of sustained economic growth, stable labor markets and the anticipated expansionary fiscal policy this year, many conditions support continued growth. However, several areas of uncertainty, including inflation concerns, are clouding this outlook. The University of Michigan consumer sentiment index fell to 57.9, down from 74 in December, the largest three-month drop since the pandemic.

Eyeing uncertainty

The new administration has announced tariffs on Mexico and Canada that have been paused, resumed and changed multiple times since their original announcement, including the percentage of the tariffs and what products are excluded. Additionally, the percentage rate of imports from China have changed from their original announcement. Canda, Mexico and China have all responded, in differing degrees, announcing potential retaliatory tariffs. The on- and off-again nature is creating challenges for consumer businesses making forecasting and risk mitigation even more difficult.

Ultimately, businesses should look to minimize costs and maximize their margins and profitability. Increased tariffs can lead to higher costs, reduced consumer demand and fewer supply options. Depending on how long the tariffs are expected to last, companies may need to make supply chain changes or forgo cost-effective long-term supply contracts to allow them the flexibility to change suppliers. Tariffs will continue to be a factor that many consumer products companies will need to manage in the coming months.

Another area of consideration is the administration’s proposal to increase domestic production of fossil fuels by speeding up the approval of drilling permits and leases, filling the Strategic Petroleum Reserve and easing regulation. One objective of these initiatives is to reduce consumers' costs for heating, air conditioning, electricity and gasoline, perhaps leaving more money to spend on consumer goods. While the administration’s policies aim to lower costs for consumers, their success depends on complex global market dynamics and industry cooperation in overall supply.

In another move potentially affecting consumers, on Jan. 29 the White House Office of Management and Budget rescinded a memo that mandated the suspension of federal assistance grants and aid. Even temporary pauses in aid could lead to late rent payments or reduced grocery budgets, affecting retailers and landlords. Companies that rely on government contracts or grants may face cash flow challenges, potentially disrupting supply chains for consumer goods, leading to worker layoffs and reducing overall consumer spending power. Until federal funding is clarified for the long term, businesses concerned about consumer sentiment and buying power may delay expansion or investment plans.

Additionally, federal aid backs government-sponsored enterprise banks, reducing risk for lenders and investors. This lower risk enables lower interest rates and attracts a larger pool of investors. Without the certainty of federal support, loans could become more expensive and less accessible, further straining borrowers already facing high mortgage rates and potentially weakening demand for home goods.

Contributing to the uncertain climate, the new administration has outlined plans to significantly reduce immigration levels and implement strict enforcement measures. The Center for Migration Studies indicates 19.8 million immigrants work in essential critical infrastructure, including industries such as agriculture, construction, hospitality and food services. A reduced immigration labor force could create upward pressures on wages, potentially resulting in higher prices for consumers across these industries. Additionally, a smaller labor population could reduce GDP, tax revenue and consumer spending power, according to the Council on Foreign Relations.

Finally, the Federal Reserve held interest rates steady in January at 4.25% to 4.5%, hinting it will remain cautious about additional rate cuts as long as the job market remains stable and inflation remains above the Fed’s 2% target. Concerns that widespread tariffs could raise consumer prices and increase inflation have led to caution in easing the restrictive economic environment. "We don't know what will happen with tariffs, with immigration, with fiscal policy or with regulatory policy," Fed Chair Jerome Powell said in a January news conference.

The confusion and uncertainty around the future cost of goods and job security in businesses affected by higher costs from tariffs could lead to more cautious consumer spending habits in the months to come.

Automation can provide some answers

Consumer companies certainly face a variety of challenges, from a tight labor market to increased supply costs. Companies that focus on improving efficiencies across their entire organization can stay ahead of the uncertain climate. Executive teams are evaluating what is possible and building frameworks for innovative business cases to enhance everything from the customer experience to supply chains and back-office operations.

While many companies are still in the early stages of exploring artificial intelligence, early adopters are already experiencing the benefits of automation. These include decreased costs, increased margins, improved employee productivity and better customer experience.

A study conducted by the Federal Reserve Board of St. Louis found that workers across industries are, on average, 33% more productive during the hours they use generative AI. According to the report,  AI adoption rates vary widely, ranging from 5% to 40%. Worker surveys within the report indicate that 20% to 40% of employees use AI on the job, with significantly higher adoption in fields such as creative and marketing departments. Even while companies evaluate large-scale AI projects, their workers are already using AI, significantly raising productivity levels.

As consumer products companies refine their AI strategies, they must incorporate large-scale initiatives as well as adopt large language models for use by workers in performing daily tasks. To manage AI initiatives effectively, companies should develop a structured framework that considers the following:

• Use case development: Companies need to create a structured framework to enable them to identify the use cases that will improve productivity, increase sales and reduce costs.
• Data strategy: Companies need to understand the data they have and how to manage it to optimize their use of AI. They will require new expertise to capture, maintain and govern the data in all of their systems.
• Data governance: While AI solutions offer significant productivity gains, they also introduce risks. Companies must establish data governance policies and oversight to ensure AI does not negatively affect business operations. This framework should not only guide AI deployment but also include ongoing monitoring to assess data bias, accuracy and security risks.
• ROI measurement: Without measurable value, AI initiatives will struggle to gain traction. Establishing a consistent method for evaluating AI productivity and measuring return on investment over the lifetime of the solution is crucial for success. For example, retail and restaurant businesses should track key metrics such as net promoter score, retention rate, sales per labor hour, customer wait time and units per transaction.
• Experimentation: Companies that foster a culture of experimentation will thrive in the early stages of AI deployment, quickly realizing productivity gains.

As businesses navigate rising labor costs, supply chain disruptions and higher capital expenses, AI presents an opportunity to reduce operating costs, enhance workforce efficiency and improve decision making. Companies that proactively implement structured AI strategies will gain a competitive edge by optimizing operations while maintaining agility in an increasingly complex economic environment.