Trumponomics was supposed to be a disaster! Then why hasn’t the US economy fallen off a cliff (yet)?
US President Donald Trump’s tariff upheaval was followed by predictions of market mayhem and a progressive decimation of the American economy. Nearly six months down the line, the impact is at best muted: the S&P 500 is actually around 10 per cent higher than it was on Liberation Day, while the dollar, though down, has strengthened over the past fortnight.
Despite higher import duties on practically all of its trading partners, Trump’s tariffs haven’t fueled a massive spike in consumer prices in the US yet. On Tuesday, a widely followed measure of inflation in the US accelerated slightly less than expected in July on an annual basis as Trump’s tariffs seemed to show a muted impact. The consumer price index increased a seasonally adjusted 0.2 per cent for the month and 2.7 per cent on a year-on-year basis, the Bureau of Labor Statistics reported Tuesday. The CPI had risen 2.7 per cent in June, when compared with the year earlier, while being slightly above the Federal Reserve’s 2 per cent target. Does it portend an impending one-time price increase to serious long-drawn inflation is really the big question.
US economy looking good despite higher import duties
There are at least three reasons why broad economic metrics still look good.
One, Trump inherited an economy that was growing at over 2 per cent, near full-employment, and subdued inflation. It will take some time to wind down.
Second, with tariffs looming after Trump repeatedly heralded threats, importers in the US front-loaded shipments from across countries to beat the tariffs. A lot of items on American retail shelves and the ones sold in recent months do not reflect the tariff incidence, purely because they hit the US shores before the tariffs kicked in. Trump’s repeated waivers and extensions have also helped matters.
The stock markets continue to get tailwinds from America’s extraordinary artificial-intelligence boom, which has pushed up projected earnings for its biggest tech companies over the last 24 months. Tech has an overweight influence on the US markets. Markets also might be expecting Trump to chicken out — on the lines of the widely-used acronym TACO, or Trump Always Chickens Out — as the impact of tariffs becomes evident. The lack of a reaction so far might be emboldening him to push ahead. But it could get bad, and the downward spiral could happen really fast.
While key economic data offers a somewhat subjective picture, with inflation having so far defied the worst of economists’ expectations even as the US consumer remains strong, there are clear signs of pockets of weakness in the labour market and a slowdown in growth. The red flags include the firing of Erika McEntarfer, the Commissioner of the Bureau of Labor Statistics (BLS) on August 1, after the agency said that non-farm payrolls — or new jobs outside of agriculture –— rose by just 73,000 in July, while the numbers for the previous two months were revised downwards by more than a quarter of a million to a mere 19,000 for May and 14,000 for June. The US President claimed the numbers were being “rigged” to make him and his Republican party “look bad”.
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Even if a new BLS chief is appointed to make the data look good, there are fundamental flaws in Trump’s worldview that could impact the American economy in the months to come. The stated aim of Trump’s tariffs — reshoring manufacturing and creating jobs back in the US — is difficult to achieve given America’s loss of competitiveness, especially in labour-intensive industries. Higher import costs will progressively feed into prices in the US; costlier goods will dent consumption, and with weaker demand job creation will taper off. These strains are likely to become more pronounced during the Fall-Winter/Christmas shopping season, potentially shaping voter sentiment in the run-up to the midterm elections.
Given that the Trump administration has significantly hiked tariffs on virtually all US trading partners, with some major economies such as the European Union, Japan and South Korea facing a 15 per cent tariff while others including Canada, Switzerland, Brazil and India facing much higher rates, upwards of 35 to 50 per cent, unless a deal is reached for each of the key trading partners, the average tariffs charged by the US on its imports would be somewhere in the 15-20 per cent range. In January, the effective average US tariff figure was 3 per cent. For the US, this entire exercise would be inflationary, even if importers or retailers were to bear part of the costs.
A slowdown is looming
The effects of inflation are starting to show up in the most likely of areas, with reports of retail majors such as Costco and Walmart hiking prices of appliances, furniture, tools and children’s items.
Also, while the Gross Domestic Product, or GDP, grew at a robust annual rate of 3 per cent in the second quarter of 2025, which was up from a half per cent contraction in the first quarter, the big driver was strong consumer spending, But much of that was on account of goods that were imported on a front-loaded basis. There is the possibility of a sharp slowdown going forward, and while a recession is not on the cards yet, a slowdown is looming.
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Apart from tariffs, there are concerns around Trump’s tax bill and how that will impact the US deficit. Some of this concern was reflected on August 6, when the 10-year American Treasury yield rose following a somewhat dismal $42 billion auction of new securities by the US Treasury Department. The benchmark 10-year note yield was up more than 2 basis points to 4.22 per cent, while the 30-year Treasury bond yield climbed more than 4 basis points to 4.813 per cent, according to Reuters data. One basis point equals one hundredth of a percentage point, and yields and prices move in opposite directions.
The US Federal Reserve, the country’s central bank, has a dual mandate of ensuring price stability and maximum employment. Fed chief Jerome Powell, who is under fire from Trump for not cutting rates, is ironically faced with a two-sided risk now, a threat to both its goals. Inflation is set to rise while employment numbers are likely to taper off. The challenge for Powell is that while keeping its benchmark interest rate too high could keep inflation in check, it could also dent the already shaky job market.
Why Trump tariffs may be here to stay
The second half of 2025 is undoubtedly going to be more unpredictable than the first, and the impact of Trump’s fickle tariff outlook could actually start showing up as business owners begin to make well educated decisions about how much they actually have to increase prices. Whereas once American shoppers were spoiled for choice, now firms that succeed in the post-Trump regime will do so not only because they are the most innovative or efficient, but because they are good at gaming the system or lobbying for sops. Fortunes will be spent on lobbying, and that makes it difficult to remove any of these tariffs even after a new administration takes office.
So, the high tariff US external outlook is likely to fester even beyond Trump.