Tariff Turbulence Ahead: Why Summer Could Signal a Shift in Economic Momentum

The U.S. economy has been buoyed by a patchwork of trade policies since 2018, but the Federal Reserve’s latest warnings suggest this artificial lift may soon fade. Austan Goolsbee, president of the Chicago Federal Reserve, recently cautioned that the “artificially high” start to 2025 could give way to a summer slowdown as the compounding effects of Trump-era tariffs—now layered with new reciprocal levies—squeeze businesses and consumers alike.

The tariff regime, which has evolved into a labyrinth of overlapping duties, is now a central risk to growth. By April 2025, the U.S. imposed a 10% baseline tariff on all imports, with country-specific rates reaching as high as 49% for nations like Cambodia and 125% for China. While some tariffs were paused for 90 days in April to allow negotiations, the sheer complexity of the system has created uncertainty for global supply chains.

The Tariff Stack: A Burden in Disguise

The problem, as Goolsbee emphasized, is that these tariffs are not standalone measures but additions to pre-existing ones. For example:
- China’s lithium-ion batteries now face 173.4% total tariffs—a combination of the 125% reciprocal tariff, 25% Section 301 duties, 20% fentanyl-related levies, and a 3.4% base rate.
- European auto imports already bore a 25% Section 232 tariff; the new 10% baseline adds further strain.

While the White House claims these measures will boost GDP by $728 billion and create 2.8 million jobs, critics argue the costs are hidden. Former Treasury Secretary Janet Yellen has warned that such tariffs risk pushing inflation higher than the Fed’s 2% target—a red flag for markets.

The Fragile Start

The first quarter of 2025 saw a surge in manufacturing activity and consumer spending, but this may reflect a “now or never” scramble to beat rising tariffs. Companies rushed to stockpile inventory, while households front-loaded purchases of electronics and appliances—categories now under scrutiny in new Section 232 investigations.

The Philadelphia Fed’s manufacturing index, which had climbed to 21 in early 2025, dropped to 7 by April—a sign of cooling momentum. Similarly, retail sales growth slowed to 0.4% in March from 1.3% in February, despite temporary exemptions for electronics.

Sectors in the Crosshairs

The Fed’s concern is not just about tariffs themselves but the sector-specific vulnerabilities they expose:
1. Semiconductors: New Section 232 investigations into chip imports aim to reduce reliance on Taiwan and South Korea. U.S. companies like Intel face a dilemma: invest in domestic production (costly) or risk supply chain disruptions.
2. Pharmaceuticals: Over 70% of active pharmaceutical ingredients for U.S. drugs come from China and India. New tariffs here could force prices higher or trigger shortages.
3. Critical Minerals: Lithium and cobalt imports, vital for EV batteries, now face 125% tariffs from China—a key supplier.

The Investment Dilemma

For investors, the summer could be a test of resolve. Sectors tied to global supply chains, such as autos (Ford, GM) and tech (Intel, Texas Instruments), face margin pressures. Meanwhile, domestic producers in energy and manufacturing might benefit—but only if demand holds.

Conclusion: A Tightrope Walk

The Chicago Fed’s warning underscores a critical truth: the tariff regime’s “artificial” boost is unsustainable. While the administration claims it will force reshoring and reduce trade deficits, the data paints a murkier picture.

• Risk to GDP: The Fed’s models suggest a 0.5% drag on growth by late 2025 if tariffs remain at current levels.
• Inflation: Core PCE prices, now at 3.6%, could climb to 4.2% by year-end as companies pass on tariff costs.
• Market Volatility: The S&P 500’s tech-heavy sectors—already pressured by AI spending—may see further declines if supply chain bottlenecks worsen.

Investors should brace for a summer of volatility. Sectors with U.S. manufacturing exposure (e.g., Caterpillar, Deere) or those insulated from trade wars (utilities, healthcare) may outperform. But as Goolsbee’s caution signals, the Fed’s next move—whether to cut rates or hold steady—will hinge on how this tariff experiment plays out.

The writing is on the wall: the era of easy wins from trade policy is over. The next chapter could be bumpy.