The recent trade agreement between the U.S. and China signifies a dramatic shift after weeks of heightened tensions. While this de-escalation is a positive development, a complete turnaround in U.S. consumer confidence and spending habits will take time, given the lingering uncertainty surrounding economic growth, job security, and inflation.

The agreement means the combined U.S. levies on most Chinese imports will decrease from 145% to 30% by May 14. While the reduced rate is still not ideal, it is significantly better than the originally threatened levy, which would have made certain products, like toys and Christmas decorations, commercially unviable. Retailers, suppliers, and consumers will still bear some of the financial burden, with Americans likely experiencing some level of price inflation on Chinese-imported nonfood items. For example, clothing prices, particularly for mid-market knitwear and coats manufactured in China, might have seen increases of 20% to 30% under the 145% tariff, but the reduced tariff should mitigate these increases.

This accord is expected to encourage retailers to resume paused orders and ship goods held in China, potentially alleviating shelf shortages during the holiday season. However, the disruption caused by the trade tensions will take time to resolve completely. For instance, toys that should have already been manufactured may not reach consumers in time for the holidays, even with immediate resumption of production. A significant risk is the potential for a surge of goods arriving in mid-market department stores out of season, leading to inventory gluts and forced discounting, similar to what occurred in 2022 when supply chain issues caused delays and out-of-season merchandise.

Consumer behavior has also been influenced by the anticipation of higher prices, leading to increased purchases in recent months. While car sales have been a primary target for those seeking to avoid price hikes, Americans have also been buying home furnishings, electronics, clothing, and footwear. These significant purchases may reduce funds available for other types of spending, and shoppers may be less inclined to make repeat clothing purchases if they have already spent their budget.

Moreover, some U.S. consumers remain wary of a potential recession, leading to cutbacks in spending across various income levels. While those with lower incomes are already economizing, middle-income consumers are also feeling the pinch. This shift is reflected in the performance of companies like McDonald’s Corp., which noted that inflationary pressures and interest rates are now affecting middle-income customers. Similarly, Sweetgreen Inc. lowered its annual guidance after experiencing a decline in same-store sales in April, coinciding with tariff announcements. The luxury goods market has also seen a weakening in demand, with Citigroup Inc.’s credit card data indicating negative growth in February, March, and April.

The agreement with China is only temporary, and tariffs on other manufacturing nations remain a concern. While a full-scale trade war may have been avoided, the tariff uncertainty continues to impact consumers. The de-escalation of US-China tariffs reduces global recession risks, boosting Wall Street. Investors are showing a greater appetite for riskier assets like stocks, with the US dollar rising and oil prices surging. Conversely, safe-haven assets like gold are declining.

The CBOE Volatility Index, a measure of market fear, has decreased, and the CNN Fear and Greed index indicates a shift towards greed in the markets. Tech stocks and luxury goods makers have seen significant gains, as have automakers. Investors are now focused on whether this temporary fix can become a lasting agreement. The Nasdaq has recovered significantly since entering a bear market in early April.

According to Treasury Secretary Scott Bessent, the trade war de-escalation was the result of tough but respectful negotiations. He emphasized that the US was negotiating from a position of strength, given China’s economic challenges and reliance on US imports. Bessent stated that the agreement is a pause, and the US will focus on expanding its supply chains for strategic necessities, reducing reliance on China for critical goods.

Kevin Hassett, Director of the National Economic Council, views the agreement as a major win for the US economy and consumers, preventing further supply disruptions from China. Hassett also noted that the recent trade frameworks with China and the United Kingdom have opened up new market opportunities for American companies.