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The US economy is headed toward an uncomfortable summer
The U.S. economy, which weathered false recession alarms in 2023 and 2024, is entering another uncomfortable summer.
Job growth held steady in May, with the economy adding 139,000 jobs. The unemployment rate has stayed in a tight range, between 4% and 4.2%, over the past year.
But there are cracks beneath the surface. Businesses are warning that constantly shifting trade policies are interfering with their ability to plan for the future, leading to hiring and investment freezes.
Policy uncertainty has unfolded against the backdrop of an economy with slower job growth and a cooling housing market. Compared with last year, the Federal Reserve is more reluctant to cut interest rates because officials are worried about new inflation risks.
John Starr, the owner of UltraSource, an importer and manufacturer of meat-processing technology in Kansas City, Mo., said he is hunkering down—no hiring, no more capital spending—until he has clarity on tariffs.
'We're going to be very careful about any cash expenditure' amid uncertainty on tariffs, says John Starr, owner of UltraSource.
The company is waiting for suppliers in Europe to finish work on $20 million in orders it placed before 10% tariffs took effect on April 9. That means he faces a $2 million levy if tariffs stay at that level.
'How am I supposed to pay this?" said Starr, a third-generation owner of the company. 'That could wipe out profits for a year."
Whether the economy again bends, rather than breaks, turns on how the U.S. consumer handles the latest curveball—this time from President Trump's desire to reorder America's trading relationships and reduce reliance on imported goods. For months, the president has announced one large tariff increase after another, at times wavering from escalation to temporary resolution.
'Where this goes all depends on what Trump decides to do next, and candidly, even Trump doesn't know what Trump will do next," said Christopher Thornberg, founding partner at Beacon Economics in Los Angeles. 'So it's almost impossible to see where this thing is heading."
Economists largely agree that for the U.S. economy to slide into recession, the American consumer needs to falter.
'As long as the consumer is doing OK, it's not going to change our world," said Ric Campo, chief executive of Camden Property Trust, a Houston-based developer and owner of 58,000 apartment homes.
Most economists think the prospects of a recession are higher than they were at the beginning of the year but lower than in April and early May, when tariffs on China had been increased by 145%.
The U.S. agreed to roll back the tariff increase to 30% last month. Most other nations face 10% tariff increases, with higher rates on dozens of countries paused until early July.
Three risks loom large.
• First, the U.S. labor market has been in an uneasy equilibrium where companies aren't hiring but are reluctant to fire workers that they hustled to find three or four years ago. Like a beach ball that shoots skyward after being held underwater, joblessness can quickly jump once companies decide demand is too soft to keep those workers.
'It starts with one large firm. Then competitors might say, 'Well, listen, we have to do the same,'" said Gregory Daco, chief economist at consulting firm EY.
Bill Hutton, president of Titan Steel, a Baltimore-based distributor and processor of mostly imported steel for products such as paint cans, said he is going to 'err on the side of caution" when it comes to reducing the size of his workforce. Having worked so hard to staff up, he said, he is 'very, very leery of making assumptions that, 'Oh, we can dial up or down our workforce at a moment's notice.' "
• Second, consumers could finally push back against rising costs, forcing companies to tighten their belts.
Delinquency rates on consumer debt have been on the rise for a year, raising fears that deteriorating finances for low-income borrowers could lead to a more pronounced slowdown in consumer spending.
For the housing market, the spring sales season has been a bust. The U.S. market now has nearly 500,000 more sellers than buyers, according to real-estate brokerage Redfin. That is the largest gap since its tally began in 2013. Home prices could fall 1% this year, said Redfin economist Chen Zhao.
'The market has been at rock bottom for the last 2½ years and there was some hope that we'd get a little bit of a turnaround this year. And it's just actually been worse than expected," said Zhao.
• Third, financial-market shocks or abrupt sentiment changes remain a wild card. The Fed reduced short-term interest rates by 1 percentage point last year, providing a measure of relief to borrowers with credit cards or variable-rate bank loans.
Officials hit pause on rate cuts this year amid concerns that tariffs might create new inflation risks. Longer-term borrowing rates, which aren't set by the Fed and which influence many borrowing costs such as mortgages, have been elevated as investors around the world pay more attention to how governments will finance rising deficits in the years to come.
Any sudden and sustained rise in borrowing costs could spill over to the stock market, hurting companies' earnings and making stocks less attractive. Lofty asset prices have supported business investment and high-income consumer spending.
For many companies, the uncertainty triggered by Trump's sudden and seemingly arbitrary announcements of tariffs has upended the outlook for sales this year.
Starr, at UltraSource, orders equipment that has a lead time measured in months. Because those products are made to each customer's specifications, Starr can't resell them if clients refuse to eat the cost of the tariff.
'I have to take action now," Starr said. 'We're going to be very careful about any cash expenditure just because we need that cash to pay the tariff."
White House officials have said they are confident the president's approach will lead to better trading relationships. 'In order to get another country to eat the burden of the tariffs, we have to have a credible threat to move our supply chains across the border…It can take some time to make that threat credible," Stephen Miran, chairman of the president's Council of Economic Advisers, said in an interview.
Miran said he couldn't produce a forecast for inflation this year because 'we're still waiting for policy details to be fully fleshed out right now." He also said businesses would benefit from a tax-cut package moving through Congress.
Starr, who said he has already racked up $300,000 in unanticipated expenses because of tariffs, said the prospect of business tax cuts is of little use if his profits are zeroed out from tariffs. He said he doesn't object to paying a 20% tariff on prospective orders as long as he has certainty the duty won't suddenly change after he has negotiated purchase orders with customers and vendors.
Steel and aluminum tariffs, which Trump this past week raised to 50% from 25%, could boost domestic metal producers while squeezing profits for carmakers, can manufacturers, and companies such as Titan Steel. Hutton, the steel company's president, said customers have been understanding about accepting some price increases because his competitors have also had to raise prices.
'It feels like we're muddling through," he said. 'Nobody—neither us, nor our customers, nor our overseas supplier—is in any position to do any long-term thinking."
The Fed aggressively raised rates in 2022 and 2023 to combat inflation. But the U.S. economy was insulated because many households and businesses had already refinanced at ultralow rates during the pandemic. Later, the economy benefited from an unexpected boom in capital spending on artificial intelligence.
Any pullback could be abrupt. 'It's very rare that you have a technology shock of this sort that doesn't lead to overbuilding," said Jason Thomas, chief economist at private-equity manager Carlyle Group.
Some companies have held back from raising prices now until they can see how tariffs settle out. 'They just said, 'We cannot take the risk of souring relations with our customers, with our suppliers, over a policy that in two months' time may not even be in place,'" Thomas said.
He expects businesses eventually will have to pass along some cost increases, however, because they will have depleted inventories acquired at pretariff rates.
One tailwind—recent declines in energy prices—could help offset some of the inflationary impulses from tariffs.
While the president often gets undue credit for what goes right or wrong in the economy, this time could be an exception.
'The economy has a lot of momentum, and so if Trump truly backs off on tariffs and just calms down, you could see this expansion going another two, three years, honestly," said Thornberg of Beacon Economics. 'Then again, if he keeps rocking the boat, you can blow it up by the beginning of next year."
