GT Voice: Time window for US economy narrowing under tariff shadow
A customer shops at a supermarket in Arlington, Virginia, US. Photo: VCG
The Federal Reserve’s Beige Book report released on Wednesday painted a grim picture of the US economy, indicating that elevated levels of uncertainty and tariffs are exerting widespread impacts on economic activity.
The US economy has contracted over the past six weeks as hiring slowed and consumers and businesses worried about tariff-related price increases, according to the Fed’s Beige Book report.
Notably, the word “tariffs” was mentioned 122 times in the report, compared with 107 times in April’s report, according to CNBC. This increase in word frequency reflects how the tariff issue continues to ferment and exert an increasingly heavy influence in the economic sphere.
Also on Wednesday, the latest economic indicator sounded alarm bells. The Institute for Supply Management said its nonmanufacturing purchasing managers index dropped to 49.9 last month from 51.6 in April, the first decline below the 50 mark and the lowest reading since June 2024, Reuters reported.
The market’s assessment of the US economic outlook is sharply divided, oscillating between cautious optimism and outright pessimism. For instance, Leif Eskesen, chief economist at CLSA, said in a recent CNBC TV broadcast that the US could avoid an economic recession “if things stay where they are,” while UBS economists warned in a recent note that US recession risks are climbing once again, backed by a cocktail of hard data, rates, and credit signals.
This divergence in perspectives reflects the significant uncertainty that the US economy is facing. It is no exaggeration to assert that the US economy stands at a critical crossroads, teetering between growth and recession. The future trajectory of the economy will largely hinge on the ability of policymakers to effectively navigate and address a myriad of pressing challenges, including inflationary pressures, labor market dynamics, and trade tensions.
Domestically, the much-anticipated tax cut bill remains a wild card. While it is theoretically designed to alleviate the burden on businesses and consumers, thereby stimulating consumption and investment, its actual effectiveness remains uncertain. It is unclear whether businesses will reinvest their tax savings into expanding production and creating jobs or allocate this money for other purposes. Similarly, it is not guaranteed that consumers will increase spending in response to tax cuts, which could drive economic growth.
Moreover, concerns about the potential expansion of the fiscal deficit add another layer of uncertainty to the economic outlook. The US Congressional Budget Office already projected the deficit for fiscal year 2025 to be $1.9 trillion, or 6.2 percent of GDP.
Internationally, external shocks, particularly the duration and impact of tariffs, have emerged as pivotal factors shaping America’s economic prospects. Instead of protecting domestic industries and narrowing trade deficits, US trade protectionism has led to a more chaotic reality: global supply chain disruptions, retaliatory measures, and eroded business confidence. The pressing question remains how major US trading partners will respond and whether they can achieve a mutually satisfactory resolution in the short term, or if the ongoing trade tensions will exacerbate economic uncertainty.
The current uncertainty cannot persist indefinitely. For starters, the time window for the US economy is constantly narrowing. There will be more and more clear data indicating the trend of the US economy. Recent data have started to show the signs. For instance, private-sector job creation slowed to a near standstill in May. Payrolls increased just 37,000 for the month, below the downwardly revised 60,000 in April and the Dow Jones forecast for 110,000. It was the lowest monthly job total from payrolls processing firm ADP since March 2023.
From the perspective of US trading partners, these countries can no longer afford to make further concessions to the US in the hopes of normalizing trade relations. A stalemate in trade talks could pose a significant risk, as a prolonged deadlock is a luxury that the world economy simply cannot sustain. Since no country wants to see global economic growth continue to decline, this impasse cannot persist indefinitely.
Given the state of the US economic indicators and US assets in the market, it is crucial for US economic and trade policies to offer sufficient certainty regarding economic prospects before it is too late.