US Congress budget office sees economic output falling from Trump tariffs

The Congressional Budget Office (CBO) projects that tariffs implemented by the Trump administration as of May 13 will decrease U.S. real economic output, while also reducing federal budget deficits by $2.8 trillion over the next decade. The CBO estimates that these tariffs will raise consumer and capital goods costs, increasing inflation by an average of 0.4 percentage points in 2025 and 2026, thereby reducing household and business purchasing power. This analysis precedes recent court rulings challenging the legality of the tariffs, which are currently under appeal.

Analysis

The non-partisan Congressional Budget Office (CBO) projects that U.S. tariffs on foreign goods, as implemented by the Trump administration up to May 13, will lead to a net decrease in real (inflation-adjusted) economic output. This contraction is anticipated due to increased costs for both consumer and capital goods. Specifically, the CBO estimates inflation will rise by an annual average of 0.4 percentage points in 2025 and 2026, consequently eroding the purchasing power of households and businesses. Despite these negative macroeconomic effects, the CBO also forecasts a substantial fiscal benefit, with the tariffs expected to reduce federal budget deficits by $2.8 trillion over the next decade. This analysis, requested by Senate Democrats, was completed before two court rulings deemed the tariffs to exceed presidential authority; the administration is currently appealing one of these rulings. The associated signals indicate a strongly negative sentiment surrounding this development, with a moderate potential market impact.

Key Decisions for Investors

• Investors should consider the potential for heightened inflation and reduced economic output to pressure corporate earnings, particularly for companies reliant on imported goods or sensitive to consumer spending.
• Monitor closely the ongoing legal challenges to the tariffs, as court decisions could significantly alter the projected economic and fiscal impacts, creating market volatility or new investment theses.
• Evaluate portfolio allocations in light of potential stagflationary pressures, considering sectors that may offer resilience or hedging benefits against rising inflation and slowing growth, while noting the long-term positive fiscal projection from deficit reduction might offer some counterbalance if tariffs are sustained.
• Factor in the increased uncertainty regarding trade policy and its direct consequences on capital goods costs and business investment decisions when assessing sector-specific and overall market risk.