"Coming Week to Significantly Assess Impact of Trump's Tariffs on Economic Data"
The American economy has experienced a surprising 3% annualized growth in GDP during the second quarter of 2025, as revealed in the latest GDP report. This growth is largely attributed to a decrease in imports, offering a glimpse of the top gauge of economic health (1). However, underlying analyses predict that tariffs will suppress GDP growth by 0.5 percentage points yearly in 2025 and 2026, leading to a permanent GDP size reduction of about 0.4% in the long run (1)(2).
Investors had expected the Federal Reserve to keep interest rates steady, and their expectations were met, with the Fed holding rates steady as anticipated (3). This decision comes less than a week after President Trump's unusual visit to the Fed, where he called for lower interest rates (4). The Fed Chair, Jerome Powell, has emphasised the importance of Fed independence.
The economic impact of tariffs is far-reaching. Tariffs are estimated to reduce annual GDP growth by about 0.5 percentage points over 2025 and 2026, with a persistent long-term contraction of roughly 0.4% of GDP (1)(2). The labor market has been affected, with tariffs raising unemployment by 0.4 percentage points by the end of 2025 and 0.7 points by 2026, corresponding to about 500,000 fewer payroll jobs by end-2025 (1).
Tariffs impose significant price increases on households, with about $2,400 more in costs per household in 2025 (3). Businesses are also feeling the pressure, with California firms incurring $11.3 billion in tariff costs in the first five months of 2025. The Port of Los Angeles is operating below capacity, and job postings in trade/logistics have declined 40% there, indicating supply chain disruption and economic ripple effects (3).
Trade policy context reveals that tariffs are used strategically by Trump to renegotiate trade terms, targeting high-tariff countries like India and aiming to promote domestic manufacturing jobs and offset deficits created by tax cuts (2). However, the overall effect is a modest but persistent drag on GDP growth, job losses, inflationary pressures, and increased costs for consumers and businesses (1)(3).
The U.S. is expected to have added 100,000 jobs in July, which would mark solid hiring but a slowdown from previous months. The labor market is starting to show signs of slowing down, according to economist Cory Stahle (5). Trade agreements have recently been struck with major partners like Japan and the European Union, but the White House is threatening additional tariffs on dozens of countries, with key partners remaining without a deal (6).
As the Fed announces its latest decision on interest rates hours after the GDP report, it's clear that the economic impact of tariffs poses persistent challenges to policymakers. A federal appeals court is set to hear oral arguments on Thursday regarding the legality of emergency authority used to impose tariffs, adding another layer of uncertainty to the economic landscape.
- The international business community is closely monitoring the Trump administration's tariff policies, as they have significant implications for the global economy.
- The financial sector is considering the potential long-term effects of tariffs on the health of the American economy, given the estimated 0.4% permanent GDP size reduction.
- In the realm of politics, the strategic use of tariffs to renegotiate trade terms, particularly with countries like India, is causing controversies, with critics arguing it may offset the benefits of tax cuts.
- Investors are keeping a close eye on the Fed's interest rate decisions, as they believe the economic pressure from tariffs could influence the central bank's monetary policy.
