Why Trump’s Economy Hasn’t Cracked Under Tariffs (Yet) | WSJ

US Economy: A Make or Break Moment

Key Concepts:

• Tariffs: Taxes imposed on imported goods.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• Gross Domestic Product (GDP): The total value of goods produced and services provided in a country during one year.
• Federal Reserve (The Fed): The central bank of the United States.
• Dual Mandate: The Fed's responsibility to maintain price stability and maximum employment.
• Interest Rates: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage.
• Recession: A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

1. Tariffs and Trade Policies:

• The Trump administration significantly increased tariffs on US trading partners on August 7th.
• Tariff rates vary: EU, Japan, and South Korea face 15%; Canada, Switzerland, Brazil, and India face 35-50%.
• China's tariff rate is subject to change depending on trade deal outcomes, potentially reaching 15-20%.
• The average effective tariff rate started the year at 3% but could exceed 10%.
• Increased tariffs are expected to be inflationary.

2. Inflation and Consumer Prices:

• The Consumer Price Index (CPI) rose 2.7% in June compared to the previous year.
• The core CPI (excluding volatile food and energy prices) rose 2.9%.
• The Fed aims for a 2% inflation target.
• Inflationary effects are appearing in big-ticket items like appliances, furniture, tools, and children's items.
• June saw a rapid pickup in price increases across various components.

3. Gross Domestic Product (GDP) and Economic Growth:

• GDP grew at an annual rate of 3% in the second quarter of 2025, rebounding from a 0.5% contraction in the first quarter.
• Growth was driven by strong consumer spending.
• However, combined with the first quarter, the economy grew 1.2% in the first half of the year, down from 2.5% in 2024.
• Economists expect 0.8% GDP growth for the fourth quarter of 2025, indicating a slowdown, not a recession.

4. Labor Market Conditions:

• Job growth slowed to 73,000 in July, falling short of expectations.
• May and June figures were revised downward by a combined 258,000 jobs.
• The labor market is slowing but not collapsing, appearing to be in balance for now.

5. The Federal Reserve's Dilemma:

• The Fed faces a dual mandate: price stability and maximum employment.
• Raising interest rates to curb inflation could harm the job market.
• The Fed faces a two-sided risk, balancing inflation control with potential damage to employment.
• The Trump administration has criticized the Fed for not lowering interest rates sooner.

6. Future Economic Outlook:

• The second half of 2025 is expected to be unpredictable.
• More clarity on the impact of tariffs on consumers and businesses is expected in the fall.
• Growth for the year is projected to be between 0.5% and 1%, below trend but potentially a "soft landing."
• Some expect no growth in the second half of the year, leading to a stagnant economic situation.

7. Notable Quotes:

• "[Trump] We have a great thing going. I think we're gonna have the richest economy you've ever seen."
• "[Economist] This is the special situation we're in, which is we have two-sided risk, risk to both of our goals."

Synthesis/Conclusion:

The US economy is at a critical juncture, with conflicting signals from various economic indicators. While GDP growth rebounded in the second quarter, driven by consumer spending, the labor market is showing signs of slowing, and inflation remains above the Fed's target. The Trump administration's tariffs add further uncertainty, with potential inflationary effects. The Fed faces a challenging balancing act in managing interest rates to achieve its dual mandate. The economic outlook for the second half of 2025 is uncertain, with projections ranging from a soft landing to stagnation. The full impact of tariffs on consumers and businesses will become clearer in the fall.