Despite tax clarity, tariffs cloud the view ahead

Note: There is a separate Economic Commentary titled, “A perspective on a Fed Chair’s influence – Policy, process, and market expectations,” which was published on July 10th.

Trend watch

We’re about halfway through the roughly 16-week summer travel season, which stretches from mid-May through the week of Labor Day. With the Independence Day holiday last week, this week saw travel numbers ebb somewhat. For instance, hotel occupancy dropped to 61.1% during the week of July 4th, which is typical. Similarly, weekly air passenger counts fell 4.7% in the past week to 18.5 million. Weakness in the week following the holiday fits the typical seasonal pattern.

Looking ahead, we anticipate that weekly air passenger counts should hit peak levels in the next two weeks. Our updated guesstimate based on the recent figures anticipates that it should eclipse the 19.7 million all-time high set last June but likely won’t top the 20 million estimate we expected several weeks ago. 

Likewise, the Independence Day holiday impacted U.S. rail volumes, which dropped 9.8% last week. Rail volumes also continue to recover from the surge and plunge in freight volumes due to the U.S.-China tariff tiff during the spring. 

Our take

Markets cheered the passage of the One Big Beautiful Bill Act (OBBBA) to start the week. The passage of the OBBBA, which included the lifting of the debt ceiling, removes two major sources of uncertainty that have plagued sentiment this year.

While the near-term economic lift from OBBBA is modest in 2025, the bill provides long-term clarity on tax policy—particularly for small businesses, farms, and high-income individuals in high-tax states. The debt ceiling resolution also reduces the risk of fiscal disruption, helping to stabilize financial markets and business sentiment as we head into the second half of the year.

Alas, tariff uncertainty remains a drag. Furthermore, tariffs have ratcheted up this week as the White House came out swinging, seemingly attempting to land haymakers around the globe – from Japan to Canada.

The on-again/off-again nature of tariff policy continues to distort economic data and decision-making. Many businesses remain in “wait and see” mode, and consumers have front-run price increases, creating air pockets in demand—most notably in autos. Until there is greater clarity on trade policy, the cloud of uncertainty will continue to hang over the economy.

Eventually, we believe the economy will strengthen on the other side – including improved mergers & acquisitions (M&A), perhaps regulatory relief, and supported by rate cuts from the Federal Reserve (Fed), which we expect later this year. But we’ve got to get there first.

Bottom line

The U.S. remains in a “muddle-through” environment—where activity is uneven, but the underlying foundation remains intact. While the passage of the tax and the debt ceiling deal offer reasons for optimism, lingering tariff and trade policy uncertainty continues to weigh on growth. We also anticipate economic data will continue to jostle about due to tariffs—replete with air pockets as demand normalizes following accelerated purchases in the early spring when consumers and businesses attempted to front-run tariffs.