State of U.S. Tariffs: July 23, 2025

The Budget Lab (TBL) estimates that current U.S. tariffs, at an average effective rate of 20.2% (the highest since 1911), will significantly burden the U.S. economy. These tariffs are projected to reduce 2025 real GDP growth by 0.8 percentage points, leading to a persistently 0.4% smaller economy long-term ($135 billion annually), while increasing the unemployment rate by 0.4 percentage points and reducing payroll employment by 594,000. Consumers face a 2.0% short-run price increase, resulting in an average household income loss of $2,700, with effects disproportionately impacting lower-income households and causing sectoral shifts where manufacturing gains are offset by contractions in construction and agriculture.

Analysis

The current U.S. tariff policy, as analyzed by The Budget Lab, presents significant stagflationary risks to the U.S. economy. With an average effective tariff rate of 20.2%, the highest since 1911, the policy is projected to reduce 2025 real GDP growth by 0.8 percentage points and cause a persistent 0.4% contraction in long-run GDP, equivalent to an annual loss of $135 billion. Concurrently, it is expected to fuel inflation, raising the overall price level by 2.0% in the short-run, which translates to a $2,700 average income loss per household. The labor market is forecast to weaken, with unemployment rising 0.4 percentage points and payrolls declining by 594,000. These tariffs are highly regressive, disproportionately burdening lower-income households whose short-run income loss is projected to be three times that of the highest decile as a share of income. Sectoral impacts are sharply divergent; while overall manufacturing output is projected to expand by 2.5%, this gain is more than offset by contractions in construction (-4.0%) and agriculture (-0.8%), with advanced manufacturing specifically declining by 2.8%. This indicates a forced reallocation of resources toward less efficient production at a significant cost to overall economic health.

Key Decisions for Investors

• Investors should consider underweighting sectors highly sensitive to US consumer spending, particularly in industries facing the largest price hikes such as apparel, footwear, and motor vehicles, due to the projected $2,700 decline in real household income.
• A defensive portfolio posture is warranted given the forecast for lower GDP growth and higher unemployment, creating a challenging macroeconomic backdrop for broad equity market appreciation.
• Scrutinize exposure to the construction sector, which is projected to contract by a substantial 4.0%, and re-evaluate positions in advanced manufacturing, which is expected to decline 2.8% despite gains in other manufacturing sub-sectors.
• Monitor inflationary pressures and potential Federal Reserve reactions, as the 2.0% short-run price level increase could impact fixed-income valuations and corporate profit margins across the board.