Deutsche Bank Warns: Tariffs, Immigration Policies to Continue Impacting U.S. Economy Despite Summer Rally

Deutsche Bank has issued a warning that the recent summer rally in U.S. stocks should not obscure the ongoing impact of tariffs and immigration policies. The bank's analysis suggests that the effects of these policies are far from over, despite the market's strong performance this summer. The benchmark S&P 500 index has risen nearly 9% since its spring low, but Deutsche Bank cautions that the repercussions of these policies will continue to be felt.

George Saravelos, the head of foreign exchange research at Deutsche Bank, noted that while the direction of U.S. tariff policies has become clearer after various trade agreement negotiations this summer, the impact on the macroeconomy and markets is far from over. He pointed out that the most direct indicator of the impact of tariffs on the economy is the actual amount of tariffs collected at the border. Currently, the 'tariff yield' is around 10% of the value of imported goods.

Saravelos explained that based on pre-trade war import patterns, the actual tariff rate is expected to stabilize between 15% and 20%, depending on the final tariff rates for semiconductors and automobiles, as well as the impact of import substitution. He attributed the current low tariff yield to factors such as transshipment trade, particularly for goods from China, and the concentration of duty-free imports of pharmaceuticals and electronics that have been pre-registered.

As these temporary factors fade, the actual tariff yield is expected to gradually approach the tariff rate estimated based on the 2024 trade landscape. From a fiscal perspective, a 15% increase in the actual tariff rate on $3 trillion in imports would equate to an additional $450 billion in tax revenue, or a 1.5% tightening of GDP through fiscal means. Previous research by the bank has shown that these costs are ultimately borne by the U.S.

In addition to the impact of tariffs, Deutsche Bank has warned that the U.S. labor market is facing significant disruptions due to a shortage of immigrant labor. This supply shock is expected to have a major impact on non-farm employment growth. Saravelos noted that the negative supply shock will have a dual impact on idle capacity, unemployment rates, and monetary policy, but it is certain to have a negative impact on economic growth. The current non-farm employment growth rate has reached levels typically associated with economic recession.

Saravelos also highlighted that in addition to the reduction in the number of immigrants, the termination of several work visa programs under the Biden administration in the coming months will further exacerbate the labor market challenges. Two programs alone, TPS and CNHV for Haiti, involve more than 700,000 people.