What have tariffs really done to the US economy?

Trump's implemented tariffs initially roiled financial markets, causing the S&P 500 to drop 12% before rebounding 6% year-to-date following a partial rollback of the most aggressive duties. Despite the stock market recovery, consumer spending is notably slowing, with retail sales declining for two consecutive months and overall spending growth at its slowest since 2020. While current inflation data appears benign, economists anticipate that higher import costs will eventually be passed on to consumers, contributing to a broader economic 'stall mode' marked by significant policy uncertainty, which is prompting businesses to defer investment and hiring and poses a risk of further economic softening or a deeper slide if more aggressive tariffs are reimposed.

Analysis

The US economy is in a precarious state of policy-induced uncertainty, caught between volatile market reactions and weakening fundamental data. While the S&P 500 has recovered from an initial 12% drop to post a 6% year-to-date gain after proposed tariffs were softened, this rebound is viewed by some strategists as investor complacency. It masks significant underperformance in tariff-vulnerable sectors such as retail and automotive. More concerning are the tangible signs of a slowdown in the real economy: consumer spending growth is at its slowest pace since 2020, and retail sales have declined for two consecutive months, falling 0.9% from April to May. Although current inflation data appears benign with a mere 0.1% monthly increase, this is likely a lagging indicator, as the full impact of tariffs, now averaging six times higher than at the start of the year, has not yet permeated consumer prices. The economy is described as being in a "stall mode," with businesses pausing hiring and investment, and while a low unemployment rate of 4.2% provides a buffer, the risk of a sharper economic slide remains elevated, contingent on whether more aggressive tariffs are reimposed after the July 9 deadline.

Key Decisions for Investors

• Investors should consider hedging against a renewal of market volatility, as the current equity market recovery may reflect complacency ahead of the critical July 9 tariff negotiation deadline.
• A thorough review of portfolio exposure to tariff-sensitive sectors like retail and automotive is warranted, as these industries continue to underperform the broader market, signaling persistent risk.
• Monitor high-frequency consumer spending and retail sales data closely, as their continued decline is a primary indicator of a potential economic downturn that could impact corporate earnings across the board.
• Look past the current low headline inflation figures, as a delayed pass-through of higher tariff costs could pressure corporate margins and consumer purchasing power in subsequent quarters.