New tariffs to reduce U.S. economic output, lower budget deficits: CBO

The CBO projects that tariffs implemented by the Trump administration will decrease U.S. economic output but reduce federal budget deficits by $2.8 trillion over the next decade. The CBO estimates inflation will rise by an annual average of 0.4 percentage points in 2025 and 2026, diminishing household and business purchasing power. This analysis, requested by Senate Democrats, was completed before court rulings challenged the tariffs' legality, which the administration is appealing.

Analysis

The Congressional Budget Office (CBO), a non-partisan agency, projects that tariffs implemented by the Trump administration as of May 13 will lead to a net decrease in real U.S. economic output. This is attributed to an anticipated increase in the prices of consumer and capital goods. Concurrently, these tariffs are forecasted to reduce federal budget deficits by a significant $2.8 trillion over the next decade. The CBO also estimates that inflation will rise by an annual average of 0.4 percentage points in 2025 and 2026 compared to its January 17 economic outlook, which is expected to diminish the purchasing power of both households and businesses. This analysis, requested by senior Senate Democrats, was completed prior to two court rulings which found that the tariffs exceeded presidential authority; the administration is appealing one of these rulings, introducing uncertainty about the tariffs' longevity and thus the CBO's projected impacts. The overall sentiment of these developments is moderately negative, reflecting concerns about economic contraction and rising inflation despite the positive fiscal implications.

Key Decisions for Investors

• Investors should monitor sectors sensitive to inflation and potential decreases in consumer and business purchasing power, given the CBO's projection of a 0.4 percentage point average annual inflation increase in 2025-2026 due to tariffs.
• The projected $2.8 trillion reduction in federal budget deficits over ten years could offer long-term fiscal stability, but this must be weighed against the immediate negative impact on U.S. economic output.
• Closely track the ongoing legal challenges to the tariffs, as their potential reversal would significantly alter the CBO's economic and fiscal forecasts, impacting investment strategies tied to trade policy and inflation expectations.
• Consider potential portfolio adjustments to account for stagflationary pressures (slower growth, higher inflation) if the tariffs remain in effect and legally upheld.