Tariffs' Subtle Effects on the Economy Show Up in Data

Economists initially forecast a drastic slowdown of the US economy following President Trump's announcement of sweeping tariffs in early April. However, three months later, inflation remains muted, the job market remains strong, and forecasters have reduced their recession predictions. While data from the Labor Department shows prices rose in some categories affected by tariffs, such as toys and appliances, the effects are subtle and have not yet significantly impacted overall economic statistics. Economists expect the evidence to mount in the months ahead as companies pass costs on to customers.

Key Takeaways:

• The Labor Department's data shows that overall inflation remained tame in June, but prices rose sharply in categories affected by tariffs, such as toys and appliances.
• Economists expect that the evidence of tariffs' effects will mount in the months ahead as companies use up inventories built up before the tariffs took effect and begin passing costs on to customers.
• Data from Goldman Sachs found that consumers initially bore only about 10 percent of the cost of tariffs, but that the share had risen to about 40 percent after three months.
• Many companies have the flexibility to wait to raise prices because they stockpiled products and materials ahead of time, leaving them with an inventory of goods purchased at pre-tariff prices.
• The job market is starting to show some cracks, with hiring in June concentrated in health care and local government, and manufacturing employment falling for the second consecutive month.
• Economists' forecasting record has been spotty, and they largely failed to foresee the surge of inflation after the pandemic, then mistakenly predicted that it would take a recession to bring prices back under control.
• The economy has less margin for error than it did during the postpandemic reopening boom, or even during Mr. Trump's first term, with job growth slowing and consumer spending showing signs of cracking.
• 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.
• Economists warn that while tariffs may not cause a recession this year, they could still cause damage over time, adding up to higher unemployment and slower growth.

Statistics:

• Overall inflation remained tame in June, with prices up only 0.1% for the month.
• Prices rose sharply in categories affected by tariffs, such as toys and appliances, with data showing a 10% increase in some goods.
• Consumers initially bore only about 10 percent of the cost of tariffs, but that the share had risen to about 40 percent after three months.
• Job growth in June was solid, with an increase of 164,000 jobs, but hiring was concentrated in health care and local government.
• Manufacturing employment fell for the second consecutive month, with a decline of 3,000 jobs.
• The unemployment rate remains low, at 4.1%, but has barely budged since Mr. Trump took office.
• Economists' forecasting record has been spotty, with them largely failing to foresee the surge of inflation after the pandemic.

Sources:

• The New York Times
• Labor Department
• Goldman Sachs
• George Washington University
• Roosevelt Institute
• Tax Policy Center
• Inflation Insights
• Harvard
• MacroPolicy Perspectives
• Brookings Institution
• Urban Institute