It is astonishingly dynamic, even under the weight of tariffs
E beckoned after President Donald Trump announced his "Liberation Day" tariffs on April 2nd. Stocks crashed; forecasters predicted a recession within the year. Three months on, the mood is rather more relaxed. Prices in shops are not noticeably higher, unemployment is flat and the & 500 index is resurgent, back at all-time highs. Mr Trump's 90-day pause for many of his tariffs, announced a week after Liberation Day to calm markets, will end on July 9th. Although he has threatened to send letters declaring talks over and tariffs back on, nobody seems too worried.
What gives? Was the president right in thinking that tariffs were a smart way to squeeze money from foreigners? Were the doommongers overdoing it?
For the moment, businesses, households and financial markets are locked in an elaborate game of wait-and-see. Companies stocked up heavily early in the year in anticipation of tariffs. Indeed, they did so by enough to drag measured growth into the red in the first quarter, as a surge of imports distorted the numbers.
These stockpiles will be run down. In many cases, they are already being depleted, meaning that businesses are turning again to imports. Last month customs duties were more than three times as high as the average in recent years (see chart 1). Companies that bring in goods from abroad now face an unpalatable choice: either they can eat the tariffs and accept lower profits, or they can pass the additional costs on to consumers.
So far, they have mostly chosen the first option. Bosses are attempting to wait out the president. Why alienate customers with higher prices if Mr Trump might change his mind and render the exercise pointless? Even in the latest consumer-price data, which still shows inflation a little above the Federal Reserve's target of 2%, it is difficult to spot a tariff impact.
In fact, doing so requires an economic microscope. Zooming in on the prices of affected categories at a few large retailers, Alberto Cavallo of Harvard Business School and co-authors do discern some slight price rises in both imported goods and their domestically produced competitors (see chart 2). However, such prices have risen by only a percent or two -- a far smaller increase than that seen in tariffs. America's effective tariff rate is now at 12%, according to calculations by the Tax Foundation, a think-tank, its highest in nearly a century. Reverting to Mr Trump's initial Liberation Day offering would mean a significant step up.
Oddly, though, tariffs may be pushing down prices via another mechanism -- by taking a toll on the economy. The Liberation Day drama crushed consumer confidence, possibly softening demand. Until recently, this has been evident only in "soft" data (surveys and the like). Now signs of it are starting to appear in "hard" data, too. A recent release showed that household spending fell month-to-month in May. Employment figures for June were strong, but bolstered by government hiring, especially of teachers. Those for the private sector were lower than expected.
A running estimate of , produced by the Fed's Atlanta branch, suggests that its core components(private investment and consumption) have fallen from an annualised growth rate of 2-3% at the start of the second quarter to 1% now (see chart 3). Goldman Sachs, a bank, has compared the latest data to previous "event driven" shocks that led to recessions, and found that today's slowdown is roughly in line with the historical norm.
Whether this is the start of something more serious depends, in large part, on how punchy the president feels on July 9th. Without a deadline extension or similar, and especially if Mr Trump doubles down on tariffs, a further slowdown seems likely. As Britain discovered after Brexit -- the most recent case of a rich country imposing large trade barriers on itself -- elevated uncertainty can by itself be sufficient to suppress business investment for quite some time. And America is now an extremely uncertain country (see chart 4).
All the same, a worse slowdown does not necessarily mean a recession. Tariffs are colliding with an economy that is, by any historical or international standard, extraordinarily dynamic. It has been growing at a consistent 2-3% a year since 2022. As a consequence, America is one of the few rich countries that might be able to shoulder even a big hit to growth and still dodge recession. The additional stimulus in Mr Trump's "Big, Beautiful Bill" is also front-loaded, meaning that it will provide a boost this year and next, which could help obscure the impact of tariffs (even if it also creates an inflationary mess for the Fed to handle). All of this suggests a future in which economists endlessly debate the true impact of the tariffs, while the American public barely notices them, despite having been left poorer. Not a triumph for Mr Trump -- but not a disaster either. ■
