Tariffs' Subtle Effects on Economy Begin to Show, Economists Say

Strategic Insights -

As President Trump's tariffs continue to affect the economy, economists say the effects are starting to show up in subtle ways. Despite initial warnings of dire consequences, including higher prices and rising unemployment, inflation remains muted and the job market remains strong. However, economists expect the evidence to mount in the months ahead as companies use up inventories built up before the tariffs took effect and begin passing costs on to customers. "It was always going to take a few months to filter into the hard data," said Tara Sinclair, an economist at George Washington University.

Key Takeaways:

  • Economists expect the effects of tariffs to show up in subtle ways in the months ahead, including in inflation and job growth.
  • Despite muted inflation, some categories affected by tariffs, such as toys and appliances, have seen price increases.
  • The job market is starting to show cracks, with signs that consumers have begun to pull back their spending.
  • Companies have stockpiled products and materials ahead of time, leaving them with an inventory of goods purchased at pre-tariff prices.
  • Many companies have the flexibility to wait to raise prices, but the longer they wait, the more tariffs will eat into their profit margins.
  • Job growth was solid in June, but hiring was concentrated in health care and local government, with manufacturing employment falling for the second consecutive month.
  • Layoffs remain low, but it is taking longer for people who are unemployed to find jobs, and workers are switching employers less often.
  • Economists' forecasting record has been spotty, with them mistakenly predicting a recession to bring prices back under control.
  • The economy has less margin for error than it did during the post-pandemic reopening boom or during Mr. Trump's first term.

Statistics:

  • American companies shouldered most of the tariff burden, with foreign exporters paying only about 20%.
  • An analysis by economists at Goldman Sachs found that consumers initially bore only about 10% of the cost of tariffs, but that the share had risen to about 40% after three months.
  • The current unemployment rate is 4.1%, and job growth has slowed.
  • Hiring in June was concentrated in health care and local government, with other sectors adding few jobs, and manufacturing employment fell for the second consecutive month.
  • It is taking longer for people who are unemployed to find jobs, with the share of workers switching employers decreasing.
  • According to economists, the tariffs that Mr. Trump announced on April 2, if allowed to take effect, would most likely have had an immediate, easily recognized impact on prices and growth.

Sources:

  • Alberto Cavallo, "Prices from Online Retailers" ( Harvard economist)
  • Omair Sharif, "Inflation Insights" (founder of the research firm Inflation Insights)
  • Laura Rosner-Warburton, "MacroPolicy Perspectives" (economist at MacroPolicy Perspectives)
  • Scott McIntyre, "The New York Times" (photographer)