Trump's tariff chaos threatens an economy already flashing yellow lights

CNN

03-03-2025

The health of the US economy is looking less and less stable by the day.
Layoffs are rising. Consumer spending — the backbone of the economy — unexpectedly dropped in January. Consumer confidence has plunged. A key GDP forecast suddenly turned negative. And extreme fear is back on Wall Street as stocks slide.
Despite the murky picture, President Donald Trump continues to inject chaos into the economy with almost-constant tariff threats.
Now he's just hours away from lobbing tariffs on not just one or two but all three of America's biggest trading partners.
Starting on Tuesday, Trump has vowed to impose a 25% tariff on imported goods from Mexico and Canada, and to double tariffs on those from China to 20%.
Those tariffs — if they get imposed — could increase costs for Americans at a time when inflation remains stubbornly high. That, in turn, could prevent the Federal Reserve from lowering borrowing costs, another source of pain in the cost-of-living problem confronting consumers.
Mexico and Canada have all vowed to retaliate by slapping their own tariffs on US goods, setting the stage for a potential trade war inside of North America. China has promised to respond to higher tariffs, too.
Even just the threat of tariffs has a cost, causing confusion and uncertainty that makes it hard for investors, CEOs and consumers to plan.
One measure of this confusion, the trade policy uncertainty index, spiked in January to the highest level in data going back to 1960. And that doesn't even factor in the latest tariff threats from the White House in recent days.
Jay Foreman, the CEO of Basic Fun!, a toy company that makes Care Bears and Tonka trucks, among other goods, said his business was just starting to contend with the 10% tariffs Trump imposed across all Chinese imports that went into effect last month.
Now the threat of an additional 10% tariff is potentially leaving his company with 'another $5 million gap' in its finances.
That's because around 90% of all the toys Basic Fun! sells are manufactured in China. Until around 2026, the company is being forced to fully absorb the added cost of tariffs because of contracts that have already been signed with customers, Foreman told CNN.
'Every plan we have to mitigate a 10% tariff is not workable based on a 20% tariff,' he said.
In Trump's ideal world, the threat of higher tariffs would cause Foreman to move production to the US. But that's simply not a financially viable option.
'There are things you aren't able to physically produce here, and toys is one of those.' China, he said, has been an unmatched location for toy production due to the manufacturing labor force, cost advantages and production capacity.
But even if it were possible to move production to the US, he said it's all but guaranteed he'd have to charge higher prices. 'A $10 baby doll will go to $30. Is that what the consumer wants?'
And it's hardly just companies that rely on Chinese goods that are concerned. Even the CEO of one of the largest US aluminum makers, Alcoa, warned the 25% tariffs Trump threatened across all aluminum imports could cost the United States 100,000 jobs.
Underscoring the growth scare gripping investors, a closely watched projection of economic growth was sharply downgraded on Friday.
The Atlanta Federal Reserve's GDPNow model now projects a 1.5% decline in GDP for the first quarter. While it's far too early to say whether GDP will indeed turn negative, it marks a swift downgrade from a growth forecast of 2.3% previously.
The decline took into account the dive in consumer spending that was reported in January's Personal Consumption Expenditures report released Friday. Consumer spending makes up about two-thirds of the US economy, meaning that pullbacks in spending can have an outsized impact on GDP.
In addition, uncertainty around tariffs could be weighing on the mood of American consumers, with recent consumer confidence metrics deteriorating at a historic pace.
Pantheon Macroeconomics noted that the 11-point drop in the Conference Board's consumer confidence index between December and February is the biggest to start a year since 2009 — during the height of the Great Recession.
Worse, the University of Michigan's consumer sentiment index's 9-point drop over that span is the most since records began in 1978.
Of course, it's far too early to know whether the softening outlook for the economy economic picture is just a blip or something more concerning.
Time and again the US economy has shaken off recession fears, including in 2022 after the Fed spiked interest rates to fight inflation, and in the summer of 2024 when the unemployment rate started to rise.
Ed Yardeni, president of investment advisory Yardeni Research, is confident the growth scare is just a headfake caused by extremely cold weather in January and uncertainty around policies in Washington.
'It's a soft patch. I don't think it's going to last very long,' Yardeni said. 'I'm betting on the underlying resilience of the economy and that it can withstand the uncertainty of Trump 2.0.'
Instead of launching a trade war, Yardeni advised Trump to 'strike a deal and claim victory' with Canada and Mexico.
'Tariffs are a toxic area. You don't want to stay there too long,' he said.