It’s only the first day of the trade war, but the consequences have already reached far beyond just the stock market.
Companies have been frantically rushing to ship goods into the US before the tariffs hit, sort of like NYC rush hour commuters squeezing past each other to catch their train before the doors close.
That’s why the US trade gap widened 26% in January, reaching a record $153 billion, according to the Commerce Department. Exports rose 2% to $172 billion for the month, while imports rose 12% to $325 billion as companies ordered in bulk to stock up ahead of tariffs.
The steep import increase contributed to a startling GDP prediction: The Atlanta Fed originally forecast that GDP would rise about 2% in the first quarter of 2025, but last Friday shifted its prediction to a 1.5% decline. In fact, just yesterday the Atlanta Fed moved its forecast even lower: It now anticipates a 2.8% contraction in GDP.
Everything is about to get pricier
That was all before tariffs finally arrived—and now that they’re here, a GDP decline isn’t the only problem the US economy faces.
Our old friend inflation is expected to get a second wind, thanks to the levies. Economists largely believe that corporations will pass the cost of tariffs onto consumers, pushing PCE higher.
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“US inflation could be 0.3 to 0.6pp higher vs baseline over the next 3-4 months (putting headline PCE inflation at 2.9% to 3.2%),” Morgan Stanley strategist Michael Zezas wrote.
Where will prices be hit the hardest? According to Bank of America, the top imports from our neighbors up north include petroleum products, metals and machinery, while the top exports from Mexico are machinery, vehicles, and food and beverages.
But what about the benefits touted by tariff proponents, such as increased domestic manufacturing?
“Higher tariffs will raise prices of imported goods, boosting demand for some domestically-produced goods,” explained Goldman Sachs Chief Economist Jan Hatzius.
But a slew of retaliatory tariffs, which will likely be implemented by Canada and Mexico, complicate that picture. “But tariff increases will also raise production costs for some domestic producers and will likely prompt foreign retaliation against some US exports, both of which could hurt domestic production,” Hatzius continued.
Hatzius also noted that, even though demand for domestic employment increased during the previous trade war in 2018/2019, it was offset by retaliatory tariffs and higher manufacturing costs.
In short: Today’s day one of the new tariff reality, and the economic effects have only just begun to unfold.—LB