What happened
On April 2nd, the White House announced dramatically higher tariffs covering most goods imported into the United States. It subsequently unveiled increased tariffs on China, though partially adjusted tariffs on most other countries to 10% and excluded semiconductor and certain electronics. Regardless, the average tariffs on imported goods is now at 28%, up more than 11-fold from 2.4% at the end of 2024, and more widely applied to a much higher percentage of U.S. imports. Likewise, many countries have announced or enacted retaliatory tariffs on U.S.-made products, which naturally increases prices and reduces demand.
Our take
We have seen further signs of the damage as a result of the ongoing multi-front trade war, which is no longer confined to a discussion of tariffs. There are boycotts of American products by foreign consumers and an unwillingness to visit the U.S., particularly by Canadians and Europeans. In 2024, Canadian travelers comprised 27% of all international visits to the United States. Backpedaling on tariffs won’t deter boycotts and the aversion to U.S. travel in the near term; those will take much longer than a few quarters. Hence, making trade deals or simply reversing announced tariffs won’t fully resolve the current uncertainty plaguing the U.S. economy. Widespread damage has been done.
In recent weeks, we’ve heard of many examples of companies making real decisions, most prominently by automakers. For example, Jeep/Ram/Chrysler maker Stellantis has furloughed plants in Canada and Mexico, as well as Michigan and Indiana. This week Mazda announced its suspending production in Huntsville, Alabama, of its CX-50 model made for the Canadian market. Others have paused rail shipments from Mexico, while a few are holding imported vehicles at U.S. ports.
We strongly caution against using the 2018-2019 tariff episode as an analog. During that period, tariffs were very targeted – mostly hitting Chinese goods along with steel and aluminum products. However, the 2018 steel and aluminum tariffs never covered Australian metals, were quickly reversed for Canada and Mexico in mid-2019 and then the European Union (EU) in 2021.
This time, there are no exemptions on steel and aluminum imports from Canada, Mexico, Brazil, the EU countries, Australia, Argentina, Japan, South Korea, and the United Kingdom. Despite being the world’s largest steel producer, steel coming from China comprised less than 2% of U.S. steel imports in 2024. In other words, most steel and aluminum imports – including production by U.S.-based companies like Alcoa – will be subject to tariffs.
Furthermore, the current tariff proposals are much higher and cover a substantially wider array of products. Even if the average tariff rate comes down further to 10% for everyone, including China, that's still four times the tariff previously.
Additionally, many American-made products have foreign components; thus, the sweeping nature of the 2025 tariff regime has a much broader impact. For instance, Pepsi and Mountain Dew will now be subject to a 10% tariff since the concentrate in made in Ireland, and parent PepsiCo said it will take longer to shift production to mitigate the impact of tariffs on their supply chain. This is a microcosm of what American producers are faced with, not to mention reversing hard-fought supply-chain efficiencies.
The on-again/off-again tariffs undermines the “Build in America” goal. At the very least, companies can’t plan, especially when there is ever-changing trade policy. Thus, many have adopted a “wait & see” attitude before committing to shift production to the United States.
This uncertainty casts a long shadow over the economy, clouding decision making for businesses. Indeed, based on our conversations, businesses desperately want these trade issues to be resolved quickly. To wit, the most frequent sentiment has been, “even if tariffs are increasing – just tell us, but don’t hopscotch from one day to the next,” which would allow them to adjust and move forward.
Accordingly, many businesses are taking a ‘wait & see’ approach, which seems prudent but isn’t pro-growth either for the economy or for business profits. At the very least, it causes some businesses to delay actions that they would have taken, while others may eventually choose to cancel plans all together due to the uncertainty. Some consumers appear to be doing the same. Furthermore, the longer this uncertainty persists, it intensifies the drag on the economy.
Alas, we lowered our growth expectations for U.S. gross domestic product (GDP) to 1.3% from 1.9% due to mounting damage from the trade war (slide 4 and 5).
Will it result in a U.S. recession?
Whether the U.S. sidesteps a recession remains an open question. We currently view recession odds in the coming 12 months at roughly 50%. At this point, current conditions remain solid. Most notably, U.S. consumers haven’t pulled back in a meaningful way. In fact, on slide 6, we show several key consumer metrics.
Also, on slide 7, we show an indexed view of real incomes, real consumer spending, employment, and manufacturing production, which illustrates the strength of this recovery since the COVID recession. Similarly, on slide 8, we show that businesses also remain in good shape.
We’d caution that some of the strength in economic data could be a bit of a mirage, whereby tariff front running has pulled forward demand for imported goods but will eventually hit an air pocket once the pre-tariff supply is exhausted and prices begin to accurately reflect the new tariff regime. This is exemplified by the spike in new auto sales, whereby the annualized rate surged to a 4-year high (slide 9).
Moreover, with businesses adding excess inventory today, there are risks there will not be sufficient demand to absorb this excess supply later. This could lead to discounting of goods and an erosion in corporate profit margins and subsequently to a reduction in labor as companies attempt to reduce expenses to protect the bottom line.
However, tariffs act like a tax, raising prices and reducing demand. In turn, reduced demand typically necessitates lower production and, eventually, fewer workers. This is the crux of the prevailing recession fears.
When it comes to GDP, there are many moving parts – most prominently, imports, which subtract from the GDP calculation. Thus, it’s possible that activity could shift from one quarter to another quarter, or a delays could gouge growth. Nonetheless, slower growth in 2025 means the U.S. is more vulnerable to a recession.
Ultimately, it appears that the U.S. should skirt a recession, which requires job losses and a broader slowdown than the simplistic rule-of-thumb of “two negative quarters of GDP.”
What would change our view?
The consumer is the key in our view and dependent on jobs. More people with jobs, which come with additional income, provides the support for continued spending.
Our preferred indicator is weekly jobless claims since economic weakness tends to materialize there first. If we see a sustained substantial increase in weekly jobless claims, then we’ll shift our recession stance. But, at present, weekly jobless claims are hovering near the pre-pandemic average.
Conversely, there are several scenarios that could exacerbate the situation. Top on the list would be a further escalation of the trade war, replete with dramatically increased tariffs pushing prices and inflation significantly higher. Over and above that would be a sharp pullback in consumer spending.
Additionally, larger job cuts and fiscal austerity due to the Department of Government Efficiency (DOGE). We are currently penciling in cuts of 200,000 federal jobs, but only 15,000 federal jobs have been cut to date. Thus, the headwind from federal job losses will persist in the coming months. Yet, the loss would be small relative to the total U.S. nonfarm payrolls of more than 159 million.
Bottom line
The U.S. economy has been resilient, but it’s in a holding pattern awaiting resolution on the tariffs. The longer this uncertainty lingers, the more intense the headwind for the economy becomes in the near term. That has contributed to the recent bouts of volatility in financial markets, which we expect will continue for the foreseeable future. To be sure, we expect a bumpy path forward.
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