Economy expected to approach stall speed as tariffs hurt consumers

The Herald Scotland

13-07-2025

In the spring, Trump announced a 90-day pause on high double-digit reciprocal tariffs for China and many other countries, easing recession fears and reversing a stock market sell-off. This week, White House officials extended the reprieve to August 1 to provide more time for negotiations.
But in recent days, Trump again has ratcheted up his trade threats, unveiling 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. Already in effect: a 50% levy on metals, 25% on cars and 30% on China, in addition to the blanket 10% charge that appears poised to rise sharply.
The Dow Jones Industrial Average tumbled nearly 280 points July 11 on Trump's latest tariff threats.
"Risks are intensifying that we may see much higher tariff rates, with consequent effects on inflation and growth," said Jonathan Millar, senior U.S. economist at Barclays.
Just 42% of CEOs of small and midsize companies plan to add to their staffs in the next year, lowest on record dating to 2003, according to a June survey by Vistage, a CEO networking group.
How close is the US to a recession?
Gregory Daco, chief economist at EY-Parthenon, has lowered his odds of a recession this year to 35% from 50% but said the chances of a downturn would climb above 50% if Trump reverts to the tariffs he rolled out in early April.
Even without the harsher import fees Trump recently announced, economists have been predicting a notable slowdown in growth the rest the year.
"We're carrying much less economic momentum, with a softening labor market trend, inflation about to reaccelerate and income (growth) more subdued," Daco said.
Will tariffs lead to inflation?
Forecasters have been surprised that tariffs haven't yet had a significant effect on inflation. Daco said that's partly because manufacturers and retailers stocked up on foreign goods in February and March, before the fees took effect.
Also, he said, companies have been routing products through bonded warehouses that delay tariff payments. U.S. businesses and foreign exporters have absorbed much of the costs. And higher prices from tariffs don't immediately show up in inflation reports, such as the consumer price index.
But all those tactics can delay the inevitable only so long, Daco said.
"As inventory buffers thin, bonded warehouse timelines expire and cost absorption runs its course, price pressures will start surfacing more clearly into the second half of 2025," he wrote in a note to clients.
Before Trump escalated the trade conflicts, many economists said the levies have pushed the average U.S. tariff rate from about 3% to 15%, a rise that would drive the Federal Reserve's preferred annual inflation measure from 2.7% to about 3.3% by the end of the year.
How does immigration affect the economy?
Meanwhile, an immigration surge that has bolstered the U.S. labor supply and job growth the past few years "is about to go into reverse," JPMorgan Chase said in a research note last week.
The Trump administration is ending provisions that temporarily protected immigrants who lack permanent legal status from deportations for humanitarian reasons. That will likely cause 1.8 million migrants, including about 1.1 million workers, to lose their legal status in the second half of the year, JPMorgan Chase said. Especially affected are industries such as agriculture, construction and hospitality.
Already, annual net immigration to the U.S. has slowed from about 3 million the past few years to an annual rate that's set to reach 500,000 by year's end, according to the Congressional Budget Office and economists. That compares to a rate of 900,000 a year before the pandemic. While the slowdown is projected to reduce job growth, forecasters reckoned that would take some time because many immigrants who arrived in recent waves are still settling into jobs.
But the spike in deportations could quickly slow America's job engine within months, JPMorgan Chase said.
How is the economy doing right now?
The economy shrank at an annual rate of 0.5% in the first quarter but forecasters said that was mostly because the flood of imports from companies stocking up had to be subtracted from output (since they're made in foreign countries). Private domestic demand, a more telling measure of the economy's underlying health, increased a solid 1.9%.
And economists estimate the government later this month will report 2% growth in the second quarter, according to those surveyed by Wolters Kluwer Blue Economic Indicators.
But those forecasters expect quarterly growth to average just 0.7% the second half of the year, in line with Millar's estimate. and above the 0.5% gain Daco projects. That's 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.
Here's a breakdown:
Consumer spending
Resilient households have propped up the economy the past few years but the threat of higher prices from tariffs has led Americans to rein in their spending, Daco and Millar said. Now, the actual pass-through of the fees into prices will likely have a more tangible impact on consumption, Daco said.
Consumers especially have been cutting back on discretionary purchases, such as recreational services, travel and dining out.
Income also has moderated, with average annual wage growth falling from about 6% in early 2022 to 3.7% in June.
After adjusting for inflation, consumer spending fell 0.3% in May and is expected to rise just 0.7% the second half of the year, according to the Wolters Kluwer survey. Consumption makes up 70% of economic activity.
The job market
Average monthly job growth has slowed to 130,000 so far this year from 168,000 in 2024.
Companies have sharply cut back hiring amid tariff-related uncertainty but remain hesitant to lay off workers following severe pandemic-related labor shortages, Millar said. But Daco said more companies are shedding workers through attrition and retirement, as well as targeted layoffs.
Tracy Marlowe, CEO of Creative Noggin, a marketing company based in San Antonio, Texas, said sales were flat last year amid election-related uncertainty. After the election, clients began making requests for new campaigns but pulled back again in early 2025 amid Trump's on-again, off-again tariffs.
Marlowe had been planning to add a full-time employee to her staff of 20 later this year but has decided to hold off.
Clients "are just trying to figure out how to stay alive," she said. "I'll hire once I need somebody."
Coping with the Great Recession and the COVID-19 downturn was easier, Marlowe said, because she knew the roadmap for recovery. By contrast, the trade war "has been a constantly changing roller coaster... It makes it very difficult to predict what's next."
The immigration crackdown is set to slow job growth further, Daco said.
Business investment
Business capital spending surged in the first quarter as firms stocked up ahead of tariffs. But the economists surveyed by Wolters Kluwer expect outlays to fall in the second, third and fourth quarters.
Companies already leery about ramping up spending amid the uncertainty are likely to hunker down further as the import costs they absorb squeeze profits, Daco said.
Housing
Housing starts fell 9.8% in May and single-family starts are down 16% since February, according to Oxford Economics.
"Elevated interest rates and higher building material costs due to tariffs will make construction less profitable," Oxford said in a research note.