Trump tariffs would lift US factory jobs, cut overall income, San Francisco Fed says

New research from the San Francisco Federal Reserve projects that the Trump administration's tariffs, modeled with a 25-30% increase on key trading partners, would lead to a 0.2% reduction in overall U.S. employment and a 0.4% drop in real income over four years. While manufacturing jobs may increase, this is expected to be offset by declines in services and agricultural employment, and income gains in some states will not outweigh losses in others, particularly those with strong trade links. This analysis provides critical insight for the Federal Reserve as it assesses the tariffs' economic impact and considers future interest rate policy.

Analysis

New research from the San Francisco Federal Reserve indicates a net negative impact on the U.S. economy from the administration's tariff policies. The model, assuming significant tariffs on key trading partners, projects a 0.2% reduction in overall U.S. employment and a 0.4% drop in real income over a four-year horizon. While the policy is expected to boost manufacturing employment, these gains are projected to be more than offset by job losses in the larger services and agricultural sectors. The economic impact is also highly uneven on a regional basis; though real income may rise in 31 states, substantial declines in large, trade-dependent states like California and Texas are expected to drive the national average down. This analysis serves as a critical input for the U.S. central bank's evaluation of the labor market and inflation, directly influencing considerations for future monetary policy, including potential interest rate cuts to counteract a softening economy. The researchers caution that these are not precise forecasts and that actual tariffs could be more onerous than the levels modeled, suggesting a potential for greater downside risk.

Key Decisions for Investors

• Given the projected net negative impact on U.S. employment and real income, a cautious stance on broad U.S. market exposure is warranted, with a focus on monitoring leading economic indicators for signs of the predicted slowdown.
• Investors should assess portfolio exposure to sectoral shifts, as domestic manufacturing may see tailwinds while the larger services and agricultural sectors, especially those with international trade links, face significant headwinds.
• The forecast of significant regional economic divergence suggests evaluating the geographic footprint of portfolio companies, as businesses concentrated in states with high trade dependency, like California and Texas, may underperform.
• The research explicitly links tariff impacts to potential Federal Reserve rate cuts; therefore, increased attention should be paid to Fed communications and inflation data, as confirmation of these economic effects could accelerate monetary easing and impact fixed-income and rate-sensitive equity valuations.