A year after Liberation Day, Trump’s tariffs have done ‘significant damage’ to the U.S. economy, says Moody’s chief economist

Liberation Day tariffs have generated $287 billion in customs duties, taxes and fees in 2025, but economists cited in the article say they have also stalled job growth and pushed consumer inflation higher, with the consumer expenditure deflator running at 3.0% year over year versus 2.5% before the tariffs. Mark Zandi argues the tariffs have done significant damage to the economy, while Treasury officials dispute the inflation effect and note legal uncertainty around the duties. The article also warns that the Iran-related oil shock could further lift commodity prices, weaken growth, and add to inflation pressure.

Analysis

The market is still underpricing the interaction between tariff passthrough and a slower labor market: once wage growth cools, households cannot absorb even modest price-level shifts without cutting discretionary spend. That makes the second-order damage disproportionately visible in the middle-income consumer, which is the cohort most exposed to private-label substitution, promotional intensity, and credit card utilization. The more important equity implication is not broad “inflation” beta, but margin compression for businesses with weak pricing power and high domestic input costs.

The Treasury revenue argument is real in the near term, but it is a fragile financing source because it depends on the same import volumes tariffs are meant to deter. If growth decelerates further, collections can flatten quickly while refund risk becomes a litigation overhang, creating a fiscal optics problem just as the administration tries to preserve room for spending. That combination is likely to keep term-premium pressure elevated even if headline deficit headlines look better on a trailing basis.

The energy shock is the cleaner macro catalyst because it attacks both sides of the Fed’s reaction function at once: higher inflation and weaker real activity. If crude stays elevated for several weeks, the probability rises that consumer sentiment and small-business capex roll over into a late-summer earnings reset, with the worst damage in transportation, leisure, autos, and low-end retail. The key contrarian risk is that markets may initially treat this as transitory, but supply shocks often show up first in earnings guidance before they appear in hard data.

For BAC specifically, this is a mixed setup: higher rates and firmer inflation support net interest income, but a consumer slowdown and credit normalization can cap upside quickly. The bank group is vulnerable if the market stops rewarding rate sensitivity and starts pricing in higher charge-offs and weaker loan growth. That makes relative positioning more attractive than outright longs here.

Key Decisions for Investors

• Short XLY vs long XLP over the next 1-3 months: tariffs and energy inflation should pressure discretionary volumes faster than staples pricing. Target 5-8% relative downside if consumer confidence rolls over; stop if oil retraces sharply and real wage growth re-accelerates.
• Buy puts on KSS or DDS with 6-12 week tenor: these are high-beta beneficiaries of discretionary spend that should feel the margin squeeze from weaker traffic and heavier promotions. Risk/reward favors defined downside over shorting the sector outright.
• Pair long XLE / short XRT for 1-2 months: energy inflation is a direct earnings tailwind for producers while retail faces both demand erosion and inventory risk. If crude remains elevated, this should outperform a broad market hedge.
• Stay tactically underweight BAC into the next earnings cycle unless credit trends stabilize: NII can look fine while reserve builds and loan demand soften. Prefer a relative short vs JPM or a call spread only if the curve steepens and charge-off commentary improves.
• Buy 3-6 month downside protection on industrials/transportation via IYT puts: fuel costs and weaker demand can compress margins quickly, and these names tend to reprice before macro data confirms the slowdown.