By
Derek Hamilton
May 13, 2025
As markets continue to grapple with the implications of US government policy, data have been mixed. Soft data, namely surveys around business and consumer confidence, have generally been weak, while hard data measuring economic activity have held up reasonably well.
The uncertainty around tariffs has produced some notable swings in hard data, mostly related to trade, as companies have attempted to front-run tariff increases by accelerating imports and building inventories. Imports get subtracted from US GDP, however, as these are goods consumed in the US but not made here. As a result, US economic growth in 1Q25 reflected the largest drag from foreign trade in history, in addition to a significant jump in inventories.
These factors should eventually reverse. Reports indicate cargo shipments from China have collapsed and, with pandemic-era supply-chain disruptions fresh in the minds of many, company decisions to avoid paying exorbitant tariff costs could cause similar disruptions again. US tariff rates of 145% on Chinese imports are unsustainable, as evidenced by US Treasury Secretary Scott Bessent’s equating the trade war between the US and China to an embargo. Indeed, the US and China recently agreed to lower tariff rates for 90 days while the countries engage in trade negotiations.
We generally believe inflation will move higher and corporate profit margins will move lower because of tariffs. And the longer it takes to bring tariff rates down from current extreme levels, the more disruption will likely occur.
Net exports’ contribution to US real GDP growth
Sources: Macquarie, Macrobond, US Bureau of Economic Analysis (BEA).
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