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

San Francisco Fed research projects that Trump administration tariffs, modeled at 25-30% on key trading partners, would boost U.S. manufacturing jobs but ultimately lead to an overall 0.2% decline in U.S. employment and a 0.4% reduction in real income over four years. This net negative impact is attributed to job losses in services and agriculture outweighing manufacturing gains, creating significant real income disparities across states, with major declines in states like California and Texas. The analysis offers crucial context for policymakers assessing potential interest rate cuts to support the economy.

Analysis

New research from the San Francisco Federal Reserve indicates that the Trump administration's proposed tariffs are projected to have a net negative impact on the U.S. economy, despite a likely boost to manufacturing employment. The model, assuming tariffs of 25-30% on key trading partners, forecasts a 0.2% decline in overall U.S. employment and a 0.4% reduction in aggregate real income over a four-year period. This net contraction is attributed to job losses in the services and agricultural sectors outweighing gains in manufacturing. The report highlights significant regional disparities, with 31 states expected to see real income growth, while larger states heavily reliant on trade, such as California and Texas, face declines. The economic impact is uneven, with some states potentially seeing real income drop by more than 2% while others could gain up to 1.7%. This analysis is a key input for Federal Reserve policymakers as they evaluate the need for interest rate cuts to support a softening economy, although the researchers caution that the study is a model and actual tariff levels could be more severe.

Key Decisions for Investors

• The projected net negative impact on U.S. income and employment reinforces a dovish outlook for monetary policy; investors should monitor upcoming labor and inflation data for signs that might accelerate the Federal Reserve's timeline for interest rate cuts.
• Consider adjusting sector exposures by potentially favoring domestic manufacturing shielded by tariffs, while exercising caution towards agriculture and service-based industries that are more vulnerable to retaliatory trade actions and overall economic drag.
• Evaluate geographic exposure within portfolios, as the significant divergence in state-level real income suggests potential underperformance for investments concentrated in large, trade-dependent states like California and Texas.