Highlights for this week include:

• The just-announced Trump tariffs were much more aggressive than expected and raise uncertainty for the outlook, presenting headwinds for economic growth and raising inflation pressures.
• However, the March business surveys remain consistent with further economic growth, despite the increased uncertainty due to tariffs.
• Further labor market strength remains the key for future consumer spending, and weekly jobless claims, a timely and accurate labor market indicator, remain consistent with job growth.
• Stocks are under pressure due to the heightened uncertainty created by tariffs. We note that deregulation and the promise of low taxes are also in the works that offer economic tailwinds. Despite the heightened uncertainty, our outlook remains for further economic growth, and we continue to recommend that investors stay focused on their long-term investment plans.

Trump Tariffs Much More Aggressive than Expected Raises Economic Outlook Uncertainty

For those countries with whom the U.S. has large goods trade deficits, Trump announced even higher reciprocal tariffs—up to 50%. Under the order, EU goods will be tariffed at 20%, Vietnam at 46%, Japan at 24%, and India at 26%.

Importantly, as it relates to U.S. imports of Chinese goods (~$490 billion as of 2024), on which Trump had already imposed a 20% tariff, the newly announced 34% reciprocal tariff on China is additional or “stacking,” meaning the minimum tariff on Chinese products will now be 54% (and even higher for products already affected by the 2018 Section 301 tariffs).

It is important to note that there will be no reciprocal tariffs imposed on Canada or Mexico in addition to the 25% tariffs announced on March 4. Further, the carve-out from the tariffs for USMCA-compliant goods (~50% of goods) will continue. There is also an off-ramp for both Canada and Mexico. If progress is made on the border and fentanyl, tariffs would decrease to 12% on those countries. Already-tariffed products like autos, aluminum, and steel (as well as forthcoming “section 232” tariffs on pharma, copper, chips, etc.) will not be subject to additional reciprocal tariffs for now.

Wednesday’s tariffs, in addition to the other tariffs Trump has announced, could increase the effective tariff rate to about 25%, which would be the highest tariffs the country has seen in over 100 years. It is important to note that Trump left the door open for negotiations and deals that could decrease or limit the scope of tariffs if trading partners take significant steps to remedy trade arrangements and align sufficiently with the United States on economic and national security matters. It should also be noted that declaring the trade deficit a national emergency under IEEPA could be legally vulnerable.

The economy was already slowing from last year’s above-trend economic growth with inflation that was stubbornly above the Federal Reserve’s 2.0% target. If these tariffs stay on, they present further headwinds to economic growth and upward pressure on inflation and a higher risk of recession.

Business Surveys Consistent with Further Economic Growth

At the beginning of the month, we get an important look at last month’s private sector economic activity from surveys provided by S&P Global and ISM. The March surveys remain consistent with further economic growth, despite the tariff uncertainty.

The S&P Global March survey showed a welcome rebound in service sector business activity after a weak start to the year, with employment also returning to growth after a decline seen in February. However, the indicated rate of expansion remains below that seen throughout the second half of last year. Combined with a weak March manufacturing reading, the survey data point to economic growth at an annualized rate of just 1.5% in the first quarter, down sharply from the 2.4% rate seen at the end of last year.

The ISM survey showed that economic activity in the services sector expanded for the ninth consecutive month in March with ten industries reporting growth, a drop of four from the 14 industries reported in each of the previous two months. There was a significant increase in the number of respondents reporting cost increases due to tariff activity. Despite an increase in comments on tariff impacts and continuing concerns over potential tariffs and declining governmental spending, there was a close balance in near-term sentiment, between panelists with good outlooks and those seeing or expecting declines.

Jobless Claims Remain Low and Consistent with Further Job Growth

Weekly jobless claims are a timely and accurate indicator of the health of the labor market. Despite tariff-related uncertainty, claims suggest that the labor market remains resilient. State initial unemployment claims fell again last week and remain at a low level. In addition, federal government-sensitive claims have shown a minimal DOGE-related spending cut impact so far. This data is consistent with continued job growth in March.