Tariffs, Jobs, and Earnings: Key Economic Indicators to Watch

The economic landscape is shifting rapidly, with new tariffs, a rebalancing labor market, and evolving earnings reports all vying for attention. As the U.S. economy navigates these changes, it's crucial to understand the implications of these developments on GDP growth, consumer prices, and the Federal Reserve's interest rate decisions.

The Impact of New Tariffs

The Trump administration's recent imposition of tariffs on imports from Canada, Mexico, and China is set to have significant repercussions on the U.S. economy. These tariffs, which include a 25% duty on all imports from Canada and Mexico and a 10% tariff on all imports from China, are expected to raise the U.S. effective tariff rate by 7 percentage points, the highest level since 1943.



The immediate effects are already being felt. Real GDP growth is projected to decrease by 0.6 percentage points in 2025 and by 0.1 percentage points in 2026. In the long run, the U.S. economy is expected to be persistently 0.3-0.4% smaller, translating to an annual loss of $80-110 billion in 2024 dollars. Consumer prices are also set to rise by 1.0-1.2%, equivalent to an average per household consumer loss of $1,600–2,000 in 2024 dollars. Post-substitution, the effect on prices settles somewhat, to 0.7-0.9%, still a $1,100-$1,400 average consumer loss per household.

The long-term effects of these tariffs include a persistent reduction in GDP growth and higher consumer prices. The tariffs are expected to raise $1.4-1.5 trillion over 2026-35 conventionally-scored, but dynamic revenue effects could reduce this by $300-360 billion. The tariffs are also regressive, meaning they burden households at the bottom of the income distribution more than those at the top. For example, the percent change in disposable income resulting from the tariffs is almost 3x as much for households in the second decile by income as it is for households in the top decile.

March Jobs Report: Signs of Rebalancing

The March jobs report provides several key indicators that suggest the labor market is rebalancing, which in turn influences the Federal Reserve's interest rate decisions. Here are the specific indicators and their implications:

1. Unemployment Rate: The overall unemployment rate fell back to 3.8% in March from 3.9% the prior month. This slight decrease indicates that the labor market remains strong but is showing signs of moderating. The Fed closely monitors the unemployment rate as a key indicator of economic health. A stable or slightly decreasing unemployment rate suggests that the economy is not overheating, which could influence the Fed to maintain or adjust interest rates accordingly.

2. Labor Force Participation Rate: The labor force participation rate rose to a five-month high of 62.7% in March. This increase was driven by workers aged 16 to 24, offsetting slight declines in prime-aged workers and participation. A higher participation rate indicates that more people are entering the workforce, which can help alleviate labor shortages and support economic growth. The Fed views a rising participation rate as a positive sign of a healthy labor market, which could influence their decision to keep interest rates steady or even consider rate cuts in the future.

3. Average Hourly Earnings: The preliminary reading of the March average hourly earnings report increased by 0.3% month-over-month (MoM). Year over year (YoY), average hourly earnings have increased by 4.1%, the slowest annual pace since mid-2021. Although wage growth remains too strong for the Fed, forward-looking indicators suggest that wage growth will moderate later this year. The Fed is concerned about wage growth as it can contribute to inflation. A moderating pace of wage growth is a positive sign for the Fed, as it suggests that inflationary pressures may be easing.

4. Job Openings: The number of job openings in February rose slightly to 8.76 million from 8.75 million the prior month, according to the BLS Job Openings and Labor Turnover Summary report. This keeps the jobs opening rate unchanged at 5.3%. The private job quits rate remains at 2.4%, below its 2019 average, indicating wage pressures are trending in the right direction. A stable or decreasing number of job openings and a lower quits rate suggest that the labor market is gradually easing, which could influence the Fed to consider rate cuts in the future.

5. Industry-Specific Employment Gains: Payroll gains in March were narrowly-based, with employment gains in health and private education, government, and leisure and hospitality contributing to 208,000 of the total job gains. Leisure and hospitality employment rebounded to its pre-pandemic level, with 49,000 gains in March, partly boosted by the milder winter. The BLS payroll index rose to 59.4 in March, showing that increasingly more industries reported jobs gains, which further drove headline payroll growth. The Fed looks at industry-specific employment gains to assess the overall health of the labor market. A rebound in specific industries, such as leisure and hospitality, suggests that the economy is recovering from the pandemic, which could influence the Fed's interest rate decisions.

Earnings Reports: A Mixed Bag

Earnings reports for the first quarter of 2025 have been a mixed bag, with some sectors showing strong growth while others struggle. The technology sector, for example, has seen robust earnings growth, driven by continued demand for cloud services and artificial intelligence. However, the retail sector has faced challenges, with many companies reporting lower-than-expected sales due to rising consumer prices and changing spending habits.



Conclusion

The economic landscape is complex and ever-changing, with new tariffs, a rebalancing labor market, and evolving earnings reports all playing crucial roles. As the U.S. economy navigates these challenges, it's essential to stay informed and adapt to the shifting dynamics. The Federal Reserve's interest rate decisions, in particular, will be closely watched as they seek to balance the need for economic growth with the risks of inflation and a potential trade war. Investors and consumers alike should brace for a period of uncertainty, but also for opportunities to capitalize on the changing economic landscape.