Mike Walden: Should you be a buyer or seller of the economy?

As the Major League Baseball season reaches the midseason point and the trading deadline looms, teams must decide if they will be buyers or sellers.

A buyer is a team that is optimistic and wants to trade for players to help them this year.

Conversely, a selling team is pessimistic about the season and wants to trade current players for future prospects.

It’s logical for both households and businesses to make similar mid-year assessments about the economy.  Should they be optimistic and continue plans to spend, invest, grow, and hopefully succeed?  Conversely, if a household or business is pessimistic about the rest of the year, they may want to save their resources, take few risks, and perhaps even sell some investments to stockpile funds for a “rainy day.”

In today’s column, I’ll present my mid-year economic assessment. Think of it as a starting point for making your own decision about whether to be a buyer or seller of the economy.

To look ahead, we first have to look back. The economy has been expanding since Covid ended. There was a slight decline in the first quarter of this year, but that was easily explained as a result of a surge in businesses purchasing imports before tariffs increased.  Imports count against national economic growth since they are a substitute for domestic production.  While the second quarter growth rate has not yet been released, forecasters think it will be positive and in the neighborhood of a 2% to 3% annualized rate. 

For many people, the job market is the most important feature of the economy. While jobs continue to be added, the pace of the increase has slowed.  Although the jobless rate is only slightly above 4%, this is higher than it’s been in many previous years.  The good news is that North Carolina’s unemployment rate is under 4%.  In North Carolina, the largest job increases have been in education and health services, government, and professional and business services.

One of the most important issues is whether worker earnings are keeping pace with inflation.  In the years immediately after the pandemic, this wasn’t the case, as the increases in prices surged past the gains in worker earnings, thereby causing the average household’s standard of living to drop. Yet in both 2023and 2024, and so far in 2025, worker earnings are rising faster than prices.

But clearly, the fight against inflation is not over. Indeed, the latest data suggest the battle has become harder. What happened?  Most economists answer with one word – tariffs.  Tariffs are taxes on imports. In an effort to motivate more production in the U.S. and less buying from foreign countries, the Trump Administration has levied higher tariffs on products from many countries, and is threatening to impose even more. In the first half of 2025, the federal government has collected over $100 billion from tariffs.

While the goal of using tariffs and the funds collected from them may seem logical and impressive, there’s an important part of the tariff equation that is often missed.  This is that tariffs are collected from the domestic importer, not the foreign exporter. That is, US businesses have paid the $100 billion of tariffs his year.  Most businesses will try to recover at least some of these costs by cutting their workforce or raising prices charged to consumers. 

Let’s now turn to the future economy during the rest of 2025.  The first question I’m most often asked about the economic outlook is, will there be a recession? I, and most forecasters, are saying no.  As long as the economy is expanding, regardless of the pace, there is no recession. But as long as the tariff war continues, while I see the economy growing, it will be growing at a much slower pace, with the annualized rate of growth being as low as 1%.  While the labor market won’t collapse, we could see the unemployment rate rise.  If the tariff war causes the nearly 3% inflation rate to persist, or possibly move higher, we could be faced with a situation economists call “stagflation.” – the combination of slow growth and higher inflation.

The “BBB” – the big, beautiful bill – recently passed by Congress could provide some support for the economy.  There are significant tax reductions for businesses in the bill which could motivate them to expand and spend more. But the question is whether businesses will take advantage of the provisions as long as uncertainties over tariffs are still looming.

Another controversial issue – migrant deportations – could have an impact on the economy. It is well known that migrant workers are very important to several industries, including agriculture, hospitality, and construction.  What happens to these industries if a significant part of their workforce is removed? A recent study by the Federal Reserve predicted economic growth will be more modest if large deportations continue.

Speaking of the Federal Reserve (the “Fed”), recognize that the Fed has important influence over the economy through its control of the money supply and its influence on interest rates. The Fed has signaled a desire to lower interest rates later this year, which would give a boost to the economy, and especially to the housing market. However, if tariffs keep upward pressure on inflation, any Fed rate cuts will likely be more modest. 

Hence, as usual, predicting the economy is challenging. For this year, keep your eyes on T-T-F, tariffs, taxes and the Fed. Will trade deals get done that help cool inflation? Will tax cuts stimulate more economic growth?  And will the Fed cut interest rates? The answers will help you decide, just like numerous major league general managers, whether to be a buyer or seller, in this case, of the economy.          

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Dr. Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.