Economists say it will take time for the effects of trade policies to show up in economic data — but acknowledge they aren’t sure how long.
When President Trump announced sweeping tariffs on American trading partners in early April, economists warned of dire consequences — higher prices, rising unemployment and possibly a recession — and the stock market confirmed these concerns, dropping roughly 10% in the two days following the tariff announcement.
Three months later, inflation is running slightly higher, but remains relatively muted. The job market remains strong, forecasters have dialed back their recession predictions, and the stock market is at an all-time high.
So what gives? Were the economists and stock market wrong in their negative assessment?
Maybe. But most importantly, there is likely to be a significant lag for the new reality to ripple through the economy and financial markets. Put another way, we can see the tariff lightning on the horizon, but we are still waiting to feel the thunder.
That said, the effects of tariffs are starting to show up in the economic statistics, at least in subtle ways. Data from the Labor Department shows that overall inflation remained tame in June, but that prices were up sharply in some categories affected by tariffs, such as toys and appliances.
The job market, too, is starting to show some cracks, and there are signs consumers have begun to pull back their spending.
Economists expect that evidence to mount in the months ahead, as companies use up inventories built up before the tariffs took effect and begin to pass along higher costs to customers.
At first, economists expected a steep slowdown. But those dire predictions came in response to the punishingly high tariff rates that Mr. Trump announced in early April. Those policies never took effect: The president paused most of the tariffs in response to turmoil in financial markets, and later agreed to temporarily reduce tariffs on China as well.
But even the reduced tariff rates are the highest in decades, and most economists are confident that the policies — and the uncertainty surrounding them — will lead to faster inflation and slower growth. But the damage will be subtler and more gradual than if the duties that Mr. Trump announced in April had taken effect.
Inflation
Consumer prices rose more quickly in June, but for the most part, inflation has remained calm in the early months of the Trump administration. So far, at least the effects have been relatively modest and have been slower to appear than some forecasters initially expected.
Economists cite several reasons for the delay. With consumer confidence low and concerns about the direction of the economy high, companies can be reluctant to raise prices too quickly lest they scare off customers. In addition, the frequent pauses and reversals in Mr. Trump’s trade policies may also be leading companies to hold off on pricing decisions until they see where tariffs ultimately settle.
A recent analysis by economists at Goldman Sachs found that consumers initially bore only about 10 percent of the cost of tariffs, but that the share had risen to about 40 percent after three months. American companies shouldered most of the rest of the tariff burden, with foreign exporters paying only about 20 percent of the cost.
The Job Market
The longer companies wait to raise prices, however, the more tariffs will eat into their profit margins. That could cause them to cut back on hiring and investment, leading to slower job growth and higher unemployment.
Those effects, too, have been slow to show up in the economic data. Job growth was solid in June, and the unemployment rate, at 4.1 percent, has barely budged since Mr. Trump took office.
But there are signs beneath the surface that the job market is losing momentum. Hiring in June was concentrated in health care and local government; other sectors added few jobs, and manufacturing employment fell for the second consecutive month. Layoffs remain low, but it is taking longer for people who are unemployed to find jobs — and workers, perhaps sensing that their jobs are on shakier ground, are switching employers less often.
Stocks
The stock market continues to climb the wall-of-worry recently hitting a new all-time high. One could argue that risks to the outlook — especially from trade policy uncertainty — is keeping a lid on market optimism. While fundamentals are gradually moving prices higher.
For instance, first quarter earnings results came in above expectations, but analysts have been hesitant to raise full-year guidance due to the unknown effect of higher tariffs. As a result, the second-quarter reporting season, which begins in earnest this week, might once again produce numerous better-than-expected results — and possibly push stocks even higher.
Ultimately, earnings will be the lens through which the overall economy’s resilience in the face of tariffs, higher rates, and a slowing labor market will be judged. So far so good, but changes to trade policy and the inevitable adaptations that companies will employ have only just begun.
Again, economic lightning can be seen on the horizon, but we have yet to hear the thunder.