Economy plunges from steady 3% growth to the edge of imminent recession within a mere two days
The employment figures for May and June were revised down by 258,000 jobs, totaling only 33,000 jobs for the two months. This disappointing job growth trend continues, as manufacturing, the sector supposedly benefiting from tariff policies, saw a decline of 11,000 jobs, its third straight monthly job loss.
Commerce Secretary Howard Lutnick claimed that the economy has officially arrived with growth of 3% in the second quarter. However, economists argue that this growth is "flattered by an increase in net exports," and the combination of higher prices and lower growth presents a quandary for the Federal Reserve as it contemplates whether to reduce interest rates at the September meeting.
The Labor Department released preliminary employment figures for July, gaining a meager 73,000 jobs. Closer scrutiny of the job numbers published Friday indicates that employment is even weaker than the headline figures indicated. The Budget Lab expects the unemployment rate to rise by 0.3 percentage points by the end of this year and 0.7 percentage points by the end of 2026.
The damage from the tariffs has fallen most heavily on Canada, with a projected long-run decline of more than 2 percentage points in GDP. The U.S. economy itself will also suffer, with a long-run shortfall of 0.4 percentage points. The tariffs will have a negative impact on agriculture, mining and extraction, and construction sectors, with long-term output expected to decline by 0.9 percentage points, 1.3 points, and 3.5 points respectively.
The Yale Budget Lab's comprehensive economic modeling suggests that the tariffs shift economic output towards manufacturing at the expense of other sectors, increase prices and reduce household purchasing power, and slow economic growth, leading to higher unemployment and a smaller overall economy in the long run. The tariffs are projected to cause a 1.7% to 2.0% increase in consumer prices short term, effectively reducing average household real income by about $2,300 to $2,700. Low-income households lose around $1,300 in purchasing power.
The White House boasted of having collected $150 billion in tariffs so far this year, but this amount is about one-twentieth of total federal revenues through June this year. The GDP release overstated second-quarter growth and consequently the rate for the first half of this year. The Budget Lab predicts that the lowest-income 10% will see their disposable income fall by about 3.4 percentage points, an average annual cost of about $1,300 per household.
The BLS will release several important economic metrics this week and next, including productivity and labor costs, consumer price index, real earnings, state-level job openings, producer price index, U.S. import and export price indexes. These upcoming reports will provide a clearer picture of the economy's health amidst tariff policies.
In summary, while the economy has shown growth in the short term, the long-term impacts of tariffs are grim. The tariffs are projected to reduce the U.S. economy's long-run size by about 0.4% to 0.5%, equivalent to roughly $135 billion annually in 2024 dollars. Real GDP growth is reduced by approximately 0.6 to 0.9 percentage points in the short term, with the economy persistently smaller in the long run if tariffs remain unchanged. The tariffs cause a 1.7% to 2.0% increase in consumer prices short term, effectively reducing average household real income by about $2,300 to $2,700. Low-income households lose around $1,300 in purchasing power. Unemployment rises by 0.4 to 0.5 percentage points with payroll employment declining by around 600,000 jobs by the end of 2025. The tariffs will have a negative impact on agriculture, mining and extraction, and construction sectors, with long-term output expected to decline by 0.9 percentage points, 1.3 points, and 3.5 points respectively. These impacts suggest a trade-off with considerable costs borne by consumers and other parts of the economy.
The employment numbers for July experienced a meager gain of 73,000 jobs, but a closer look suggests an even weaker job market. The loss of jobs in the manufacturing sector, totaling 11,000 in the last three months, continues to be a cause for concern.
Economic models by the Yale Budget Lab predict that tariffs could lead to a reduction in the U.S. economy's long-run size, equivalent to roughly $135 billion annually in 2024 dollars.
The White House's collection of $150 billion in tariffs this year only accounts for about one-twentieth of total federal revenues through June, indicating a limited financial impact.
The Federal Reserve is faced with a quandary as higher prices and lower growth present a challenge. Economists argue that the growth of 3% in the second quarter was "flattered by an increase in net exports."
The Labor Department's upcoming reports on productivity and labor costs, consumer price index, real earnings, and job openings, among others, will offer a clearer picture of the economy's health in the context of tariff policies.
