United States: Tariff-related Economic Update
2025-04-23
■ The average tariff rate in the United States has reached about 20%, and the economy faces the risk of high inflation and recession
■ The Federal Reserve is caught between inflation and economic deterioration, and the president's mention of removing the chairman has raised concerns about independence
Since the details of the mutual tariffs on "American Liberation Day" were announced, the confusion surrounding the Trump administration's tariff policy has continued to ferment. Based on the decisions made so far, the average tariff rate in the United States has been raised to about 20%, reaching the highest level since the 1930s. In the next one to two months, tariffs on semiconductors and pharmaceuticals are expected to be announced, and the uncertainty of the outlook remains significant. In addition, trade frictions between the United States and China are rapidly intensifying, and the average tariff rates imposed by both sides on each other have exceeded 100%. The United States' imports from China account for 1.5% of its GDP, and exports to China account for 0.5%. If the US-China trade stagnates completely, the impact on the economy will be extremely significant. Although the United States has launched negotiations with major trading partners such as Japan and the European Union, which have brought some bright spots to the situation, it will take some time to reach an agreement. The US economy still faces the risk of high inflation caused by supply shocks and the subsequent economic recession.
Judging from recent economic data, economic activity remains strong. Although it is necessary to take into account the effect of the early release of short-term demand before the tariff increase, the US economy has remained robust overall. Retail sales rose 1.4% month-on-month in March, hitting a two-year high. This was mainly due to the surge in auto sales before the tariff increase, but core sales (the items used as the basic data of personal consumption in GDP statistics, excluding automobiles, food, building materials, and gasoline) also rose 0.4%, showing a solid foundation for consumption. Manufacturing output rose 0.3% month-on-month, and manufacturing activity, which had been stagnant for about two years, has recently rebounded. In the United States, when the economy deteriorates, costs are usually cut quickly through layoffs, so economic growth slowdowns often occur simultaneously with a deterioration in the labor market. However, the number of new unemployment claims in the week ended April 12 fell to the lowest level since early February, and there is no sign of a recession yet. On the other hand, sentiment indicators continued to deteriorate, warning of a possible slowdown in household and business activity in the future. The University of Michigan Consumer Confidence Index hit a new low since 2002 in April, and the future expectations of the New York Fed Manufacturing Sentiment Index also fell to the lowest level since 2001.
The Federal Reserve (FRB) faces a difficult situation. As an institution with the dual goals of maintaining price stability and achieving maximum employment, the Federal Reserve is expected to be caught in a dilemma between inflation and economic deterioration under the supply shock caused by tariffs. Chairman Powell is currently cautious about cutting interest rates to assess the impact. However, President Trump expressed dissatisfaction with this, demanding an early rate cut and mentioning the removal of the chairman, which has raised concerns about the independence of the central bank. If the independence of the Federal Reserve is weakened, it will undermine the public's confidence in its ability to stabilize prices, thereby increasing the risk of inflation. The uncertainty stemming from US politics has not yet shown any signs of easing.
■ The Federal Reserve is caught between inflation and economic deterioration, and the president's mention of removing the chairman has raised concerns about independence
Since the details of the mutual tariffs on "American Liberation Day" were announced, the confusion surrounding the Trump administration's tariff policy has continued to ferment. Based on the decisions made so far, the average tariff rate in the United States has been raised to about 20%, reaching the highest level since the 1930s. In the next one to two months, tariffs on semiconductors and pharmaceuticals are expected to be announced, and the uncertainty of the outlook remains significant. In addition, trade frictions between the United States and China are rapidly intensifying, and the average tariff rates imposed by both sides on each other have exceeded 100%. The United States' imports from China account for 1.5% of its GDP, and exports to China account for 0.5%. If the US-China trade stagnates completely, the impact on the economy will be extremely significant. Although the United States has launched negotiations with major trading partners such as Japan and the European Union, which have brought some bright spots to the situation, it will take some time to reach an agreement. The US economy still faces the risk of high inflation caused by supply shocks and the subsequent economic recession.
Judging from recent economic data, economic activity remains strong. Although it is necessary to take into account the effect of the early release of short-term demand before the tariff increase, the US economy has remained robust overall. Retail sales rose 1.4% month-on-month in March, hitting a two-year high. This was mainly due to the surge in auto sales before the tariff increase, but core sales (the items used as the basic data of personal consumption in GDP statistics, excluding automobiles, food, building materials, and gasoline) also rose 0.4%, showing a solid foundation for consumption. Manufacturing output rose 0.3% month-on-month, and manufacturing activity, which had been stagnant for about two years, has recently rebounded. In the United States, when the economy deteriorates, costs are usually cut quickly through layoffs, so economic growth slowdowns often occur simultaneously with a deterioration in the labor market. However, the number of new unemployment claims in the week ended April 12 fell to the lowest level since early February, and there is no sign of a recession yet. On the other hand, sentiment indicators continued to deteriorate, warning of a possible slowdown in household and business activity in the future. The University of Michigan Consumer Confidence Index hit a new low since 2002 in April, and the future expectations of the New York Fed Manufacturing Sentiment Index also fell to the lowest level since 2001.
The Federal Reserve (FRB) faces a difficult situation. As an institution with the dual goals of maintaining price stability and achieving maximum employment, the Federal Reserve is expected to be caught in a dilemma between inflation and economic deterioration under the supply shock caused by tariffs. Chairman Powell is currently cautious about cutting interest rates to assess the impact. However, President Trump expressed dissatisfaction with this, demanding an early rate cut and mentioning the removal of the chairman, which has raised concerns about the independence of the central bank. If the independence of the Federal Reserve is weakened, it will undermine the public's confidence in its ability to stabilize prices, thereby increasing the risk of inflation. The uncertainty stemming from US politics has not yet shown any signs of easing.