Tariffs Likely Will Slow Growth To Nil by Year End

President Trump this month announced additional tariffs on goods imported from virtually every country outside of the United States. The new tariffs consist primarily of an across-the-board minimum base levy of 10% or a higher “reciprocal” tariff. In calculating the “reciprocal” tariff, the administration intends to levy one-half of the U.S. tariff required to equalize the impact of both tariff and non-tariff barriers a foreign country applies against U.S. exports.

The near-term impact of the tariffs will likely be to slow economic growth and raise domestic prices. However, even in advance of the president’s announcement, data pointed to a weaker-than-anticipated outlook. Notably dour consumer sentiment, falling retail sales, slowing manufacturing activity, contracting construction activity, surging imports, and heightened policy uncertainty all pointed toward slower economic growth.

Based on the cumulative effect of tariffs announced to date, the weighted average U.S. tariff is 24%. This is above the peak average 20% rate in effect after the passage of the infamous Smoot-Hawley Act in 1930, but below the average tariff of 30% from 1820 to 1900.

In any case, U.S. tariffs are more aggressive than AMG previously anticipated. Further, tariff uncertainties have not gone away. The extent of retaliation by tariffed countries is not yet known, but retaliation is all but a foregone conclusion. Likewise, the extent of supply chain effects, as companies seek to minimize tariffs by changing the location of offshore production, is unknown but could be substantial. Also, the Trump administration has left the door open for negotiations. So, tariffs may change, downward or upward.

The impact of the tariffs will almost certainly lower economic growth but are unlikely to be catastrophic. Tariffs will cut growth in 2025 and 2026 and add to the level of consumer prices.

The impact on annual inflation rates depends upon how fast that addition occurs. Finally, the unemployment rate is likely to tick up over 2025-2026, peaking sometime in 2026.