US Hiring Seen Slowing, With Brunt of Tariff Impact Coming Later

The U.S. labor market remains resilient in early 2025, with March nonfarm payrolls rising by 228,000 and the unemployment rate holding steady at 4.2%. Yet beneath the surface, signs of a slowdown are emerging, and the full economic consequences of recent tariff hikes—particularly their drag on manufacturing and trade—may not hit until late this year. Investors should prepare for a bifurcated landscape: sectors like healthcare and transportation may hold up, while manufacturing and consumer discretionary industries face headwinds.

The Employment Crossroads
Recent data paints a mixed picture. While healthcare added 54,000 jobs in March and retail rebounded post-strike, federal government employment fell by 4,000—a harbinger of potential broader layoffs if fiscal pressures intensify. Wage growth, though steady at 3.8% year-over-year, shows cracks: average hourly earnings rose just 0.3% month-over-month, the smallest gain since late 2023.

The labor force participation rate remains stuck at 62.5%, suggesting limited pent-up demand for workers. Meanwhile, long-term unemployment (21.3% of the jobless total) signals structural mismatches in industries hit by automation or trade disruptions.

Tariffs: The Time Bomb in Trade Data
The first quarter’s GDP contraction of 0.3%—the first since late 2022—was largely due to a 50.9% surge in imports as businesses stockpiled goods ahead of impending tariffs. The trade deficit hit a record $162 billion in March, with imports outpacing exports by a widening margin. But this “sugar high” of inventory accumulation may soon fade.

Key tariff policies now in effect include:
- Aluminum/Steel: 25% tariffs on non-USMCA-compliant imports, hitting construction and automotive supply chains.
- Automobiles: 25% levies on vehicles not meeting USMCA’s North American content rules, potentially raising prices for consumers.
- China: Retaliatory 125% tariffs on U.S. goods, exacerbating trade imbalances and inflation risks.

The delayed impact is clear: while Q1 saw a temporary boost from front-loaded imports, the true cost—higher production costs, reduced competitiveness, and retaliatory measures—will likely surface in late 2025. Analysts warn of a “mild recession” risk if these factors combine with slowing consumer spending and Federal Reserve policy uncertainty.

Sector Spotlight: Winners and Losers
- Healthcare and Social Assistance: Steady demand for caregiving and mental health services positions these sectors to weather the slowdown.
- Transportation: Gained 23,000 jobs in March as supply chains adjusted to tariff-driven disruptions.
- Manufacturing: Faces a triple threat: higher material costs, retaliatory tariffs abroad, and reduced demand for export-heavy goods.
- Consumer Discretionary: Marginal households, burdened by credit card debt and stagnant wages, may cut back on non-essentials.

Investment Strategy: Navigate the Crosscurrents
- Short-Term Plays: Consider defensive stocks in healthcare (e.g., HUM, UNH) and utilities, which benefit from stable demand and Fed rate-cut expectations.
- Avoid Tariff-Exposed Sectors: Auto manufacturers (GM, TSLA) and industrial firms (CAT, DE) face margin pressures unless they can pass costs to consumers.
- Monitor the Fed: With Treasury yields falling and rate-cut odds at 45% by May, bond markets signal caution. A Fed pivot could stabilize markets but won’t offset structural trade risks.

Conclusion: Prepare for a Rocky Second Half
The U.S. economy is at an inflection point. While March’s jobs report avoids immediate crisis, the full weight of tariffs—compressed profit margins, retaliatory trade measures, and dampened investment—is set to materialize in late 2025. Investors should prioritize sectors insulated from trade wars and inflation, such as healthcare and essential services, while hedging against manufacturing and consumer discretionary weakness.

The data is clear: the labor market’s modest growth and the GDP contraction’s underlying causes point to a year of uneven recovery. With the Federal Reserve’s next policy decision hanging in the balance, patience and sector-specific analysis will be critical to navigating this choppy economic environment.