U.S. economy muddling through tariff turbulence
Trade and tariffs have seemingly been the only story during the past few months. Alas, the U.S. economic data continues to jostle about due to tariffs – or as we’re referring to it, “hurry up and wait.” Growth accelerated in March and April as consumers and business attempted to front run tariffs; this is the “hurry up” part. Indeed, consumers rushed to buy goods that they believe will be negatively impacted by tariffs – everything from cars to smartphones. (In mid-April, tariffs were temporarily paused on certain electronics, including smartphones, laptops, and televisions.)
Meanwhile, the main inflation gauges show very little impact from the tariffs, which has helped markets rebound from the sharp downdraft in March and April and has kept them mostly climbing since. However, we don’t expect that this trend will persist, particularly as increased tariffs begin to bleed into prices. Many companies rushed to fill their foreign orders ahead of the tariffs, which is clearly reflected in the freight data for February, March, and April. Consequently, we believe that many of the goods sold through mid-May—when the price surveys were conducted for the two main inflation gauges—were filled from pre-tariff inventories. Given the on-again/off-again nature of the tariffs, some companies have yet to adjust prices. As those pre-tariff inventories are depleted, we anticipate pricing for newly received goods will reflect the tariffs.
While we foresee prices increasing in the coming months, we don’t anticipate massive, widespread price increases. Companies will continue to adapt to the price changes and will adjust prices accordingly. With all imported steel and aluminum tariffs doubling to 50% regardless of origin, we may see higher new vehicle prices along with automakers experiencing higher production costs and disruptions in supply chains. That’s already starting to impact the new vehicle affordability index, which declined sharply in April. On a positive note, we’re beginning to see the stubbornly grim consumer sentiment thaw somewhat.
Hence, the U.S. remains in a “muddle-through” environment—where growth has slowed but not stalling. While that’s hardly pro-growth, it doesn’t suggest doom and gloom either. Instead, it likely keeps the Federal Reserve (Fed) in “wait & see” mode for the for several more months, including at the June meeting.
