Trump's 10% Tariffs Spark 10% GDP Contraction Fears

On April 2, President Trump signed two executive orders imposing a 10% "minimum baseline tariff" on trading partners and higher tariffs on certain partners. This move is expected to have significant repercussions on the U.S. economy, with analysts predicting a 10% contraction in the country's second-quarter GDP.

High Frequency Economics' chief economist Carl Weinberg warned that the tariffs could lead to a 10% reduction in the U.S. GDP during the second quarter of 2025. This follows a projected slight contraction in the first quarter, potentially pushing the world's largest economy into a recession. Weinberg estimated that the tariffs could reduce U.S. household income or corporate profits by $741 billion. If all tariffs on aluminum, steel, and non-exempt trade with Canada and Mexico are fully considered, the reduction could be even greater. He calculated an average tariff rate of at least 30% on trade with about two dozen countries, higher than previously anticipated.

Weinberg also noted that the U.S. economy would face inflationary pressures, with prices of imported goods like softwood lumber potentially rising by 25%. Even with economic downturn pressures mitigating some inflation, the overall impact on prices remains concerning. Weinberg expressed worries about the broader economic implications, stating that once a company fails due to tariffs, it won't recover even if the tariffs are lifted. He questioned whether profit impacts would lead to stock market declines and whether the economy could adapt to the new tariff regime without significant collateral damage.

The implementation of these tariffs is anticipated to exacerbate inflationary pressures, which are already a concern. The latest data from the U.S. Department of Commerce shows that the Personal Consumption Expenditures (PCE) price index rose 0.3% month-over-month and 2.5% year-over-year in February. Excluding food and energy, the core PCE price index increased 0.4% month-over-month and 2.8% year-over-year. These figures highlight the growing inflation challenge in the context of increased tariffs.

Economists warn that the new tariffs will drive up consumer prices, affecting everything from automobiles and household appliances to gasoline and groceries. This price increase will strain household budgets, particularly for lower- and middle-income families, who are already grappling with rising living costs. The National Retail Federation has expressed concerns that the tariffs will disrupt the retail supply chain, leading to higher prices for American households.

The tariffs are also expected to disrupt supply chains and increase production costs for U.S. manufacturers, who rely heavily on imported raw materials and components. This could lead to a reduction in manufacturing output and job losses. The U.S. Department of Labor reported that non-farm payrolls increased by 151,000 in February, with the unemployment rate at 4.1%, both figures falling short of market expectations. This suggests that some companies may be pausing hiring due to uncertainty surrounding the tariff policy and economic outlook.

Goldman Sachs has raised the probability of a U.S. recession in the next 12 months to 35%, up from a previous estimate of 20%. The firm attributes this increased risk to the potential for tariffs to stifle economic growth, reignite inflation, and drive up unemployment.

The tariffs are also expected to have a chilling effect on consumer confidence, which has been on a downward trajectory. The Conference Board's Consumer Confidence Index for March stood at 92.9, below market expectations of 94.2 and February's 98.3. The expectations index, which reflects short-term income prospects, business, and employment conditions, fell to 65.2, the lowest level in 12 years. A drop below 80 in the expectations index is often seen as a signal of an impending economic recession.

In summary, the new tariffs are expected to have far-reaching effects on the U.S. economy, from increased inflation and reduced consumer spending to disrupted supply chains and potential job losses. The full impact of these tariffs remains to be seen, but the initial indications suggest that they could have a significant negative effect on the U.S. economy in the coming quarters.