Every day, the U.S. economy is hit with new bad news as President Donald Trump’s tariffs cause further harm across wide swaths of the economy. Yale’s Budget Lab economists point to a sharp uptick in the effective U.S. tariff rate. It has surged from roughly 2% to an alarming 18%, the highest rate we’ve observed since 1934. These new rules go well beyond environmental policy—they’ll harm the labor market, raise costs for consumers, and impede economic growth. As the Trump administration’s trade war with China escalates, the effects are being felt.
Over the last few months, growth in the U.S. GDP shrunken substantially. Significantly, that was despite a contraction in the first quarter of the year. This dramatic change in the economy has big implications for Trump’s revival plan for manufacturing, “Made in America.” It has failed to achieve the outcomes that many thought it would. Average monthly employment gains have slowed to just 133,000 a month – the lowest rate since 2010 – indicating storm clouds on the horizon.
The U.S. manufacturing base, an essential part of any strong U.S. economy, has seen back-to-back monthly job losses. This downward trend is a significant blow to one of Trump’s biggest economic wins. He was right to push to strengthen this growing sector through his trade policies.
Rising Costs and Consumer Impact
Without a doubt, these tariffs have hit American businesses hard. According to recent estimates, the average household is now paying an additional $2,400 per year. This jump in cost is due specifically to the recent tariff increases. With inflation causing costs to increase, consumers are adjusting their purchasing behavior. They’re buying basic necessities, such as back-to-school supplies, early to dodge inflationary price increases.
“It’s basically going to say, you’re going to pay 10%, you’re going to pay 15%, you’re going to pay maybe less, I don’t know.” – Donald Trump
These comments highlight the confusion and lack of clarity that consumers need to deal with as they adapt to a new economic reality. It’s clear that netting out both sets of tariffs together has disproportionately raised costs. Yet they have rattled consumer confidence and slowed a budding optimism about the economy’s recovery.
The Federal Reserve is preparing to act on these inflationary pressures. It indicated recently that it will reduce its key overnight lending rate starting in September at the latest. This action is intended to promote economic growth. While the sector had weathered the storm, it too is beginning to roll over thanks in no small part to the wreckage that is Trump’s tariff policies and other headwinds.
Labor Market Struggles
After years of showing signs of a remarkably tight U.S. labor market, recent signs are starting to tell the opposite story. More recently, labor force has contracted. Perhaps this contraction is fueled by the anti-immigrant rhetoric leading to mass deportations that have effectively shrunk our available workforce participation.
Additionally, as we touched on in the story on retaliatory tariffs, Trump’s tariffs made the situation worse by increasing businesses’ cost of operation. When companies are faced with rising costs, they often have little choice but to lay off employees or stop hiring as a function of their business. The job losses in the manufacturing sector serve as a leading example of this growing fear.
The economic challenges just continue to grow. It’s unclear how much longer the labor market can continue to return to such levels of employment and job growth. The double whammy of inflation and consumer pessimism is proving to be a lethal cocktail, undermining short-term growth and potential long-term prosperity.
Legal Challenges and Future Implications
Moreover, aside from their economic ramifications, Trump’s tariffs are under legal attack. An appeals court is set to soon hear arguments over the legality of these tariffs. This is after a lower court’s ruling, which said that Trump exceeded his authority when he put them in place.
Indeed, the result of this legal dispute could have far-reaching effects on U.S. trade policy and the overall state of the economy in the years ahead. That means if the court rules against the administration, tariffs will be rolled back. This decision would provide short-term relief for American consumers and businesses.
Now that this consequential week has arrived for our economy’s future, stakeholders from public and private sectors are tuned in to see how it all goes down. Tariffs, legal challenges, and macroeconomic trends are all interconnected. Collectively, they will play a huge role in shaping U.S. trade policy—for better or for worse—and in turn shape the daily lives of average Americans.