Trump's tariffs threaten US economic growth

Rising Uncertainty and Economic Challenges in the U.S.

The U.S. economy has faced a cloud of uncertainty throughout the first half of 2025, with growing concerns that this uncertainty could lead to a significant slowdown in the second half of the year. The policies proposed by President Donald Trump, including higher tariffs on imports and an immigration crackdown, are contributing to these worries. These actions are expected to impact consumers and the job market, potentially dampening overall economic growth.

On July 10, Trump announced plans to increase the tariff rate on many Canadian imports from 25% to 35%, and to impose a blanket 15% to 20% duty on most other countries, up from 10%. This was followed by another escalation on July 12 when he announced 30% tariffs on all imports from Mexico and the European Union. These moves have raised concerns among economists and business leaders about the potential for a more pronounced economic pullback.

In response to earlier trade tensions, Trump had previously announced a 90-day pause on high double-digit reciprocal tariffs for China and many other countries, which helped ease recession fears and reverse a stock market sell-off. However, recent developments have seen a shift back toward increased trade threats, with plans for a 50% tariff on imported copper, 50% on all shipments from Brazil, and high fees for 14 countries that don’t reach a deal with the U.S. by August 1.

The Dow Jones Industrial Average tumbled nearly 280 points on July 11 due to these latest tariff threats. Jonathan Millar, senior U.S. economist at Barclays, noted that risks are intensifying, with potential consequences for inflation and growth.

Impact on Employment and Business Plans

A June survey by Vistage, a CEO networking group, found that only 42% of CEOs of small and midsize companies plan to add to their staffs in the next year, marking the lowest level since 2003. This indicates a cautious approach among business leaders, likely influenced by the ongoing trade uncertainties.

Gregory Daco, chief economist at EY-Parthenon, has lowered his odds of a recession this year to 35% from 50%, but warned that if Trump reverts to the tariffs he rolled out in early April, the chances of a downturn would climb above 50%. Even without the harsher import fees, economists predict a notable slowdown in growth for the rest of the year.

Inflation and Tariff Effects

Forecasters have been surprised by the limited impact of tariffs on inflation so far. Daco explained that this is partly because manufacturers and retailers stocked up on foreign goods before the fees took effect. Additionally, companies have been routing products through bonded warehouses that delay tariff payments, allowing both U.S. businesses and foreign exporters to absorb much of the costs. However, as inventory buffers thin and bonded warehouse timelines expire, price pressures are expected to become more evident in the second half of 2025.

Before Trump escalated the trade conflicts, many economists said the levies had pushed the average U.S. tariff rate from about 3% to 15%, which could drive the Federal Reserve’s preferred annual inflation measure from 2.7% to about 3.3% by the end of the year.

Immigration and Labor Market Changes

Meanwhile, an immigration surge that has bolstered the U.S. labor supply and job growth over the past few years is set to reverse. The Trump administration is ending provisions that temporarily protected immigrants who lack permanent legal status from deportations for humanitarian reasons. This could result in 1.8 million migrants, including about 1.1 million workers, losing their legal status in the second half of the year, particularly affecting industries such as agriculture, construction, and hospitality.

Annual net immigration to the U.S. has slowed from about 3 million in recent years to an estimated 500,000 by year’s end, according to the Congressional Budget Office and economists. While the slowdown is projected to reduce job growth, forecasters believe it will take some time because many immigrants who arrived in recent waves are still settling into jobs. However, the spike in deportations could quickly slow America’s job engine within months.

Current Economic Performance

The economy shrank at an annual rate of 0.5% in the first quarter, but this was largely due to the flood of imports from companies stocking up, which had to be subtracted from output. Private domestic demand, a more telling measure of the economy’s underlying health, increased a solid 1.9%. Economists estimate the government will report 2% growth in the second quarter later this month.

However, forecasters expect quarterly growth to average just 0.7% in the second half of the year, close to stall speed. From the fourth quarter of 2024 to the fourth quarter of 2025, Millar estimates the economy will grow a meager 0.5%, compared to 2.5% the prior year.

Consumer Spending and Job Market Trends

Resilient households have supported the economy in recent years, but the threat of higher prices from tariffs has led Americans to rein in their spending. Consumer spending, which makes up 70% of economic activity, fell 0.3% in May and is expected to rise just 0.7% in the second half of the year. Income growth has also moderated, with average annual wage growth falling from about 6% in early 2022 to 3.7% in June.

Average monthly job growth has slowed to 130,000 this year from 168,000 in 2024. Companies have cut back on hiring amid tariff-related uncertainty, though they remain hesitant to lay off workers following severe pandemic-related labor shortages. However, more companies are shedding workers through attrition and retirement, as well as targeted layoffs.

Business Investment and Housing Sector

Business capital spending surged in the first quarter as firms stocked up ahead of tariffs, but economists expect outlays to fall in the second, third, and fourth quarters. Elevated interest rates and higher building material costs due to tariffs are making construction less profitable, leading to a decline in housing starts. Single-family starts are down 16% since February, according to Oxford Economics.