How Trump tariffs could impact U.S. economy and the Fed

(The Center Square) – In line with his campaign promises, President Donald Trump has announced the imposition of tariffs on imports from Canada, Mexico and China, effective Tuesday, Feb. 4. Imports from Canada and Mexico will face a 25% tariff, with a reduced 10% rate applied to Canadian energy resources. Goods from China will be subjected to a 10% tariff.

Economists are assessing the potential economic impact of these tariffs. Goldman Sachs Economic Research estimates that long-term tariffs on imports from Canada and Mexico could raise core inflation – measured by the PCE – by 0.7% and reduce economic growth by 0.4%.

In the third quarter of 2024, the total value of U.S. imports of goods and services from Canada and Mexico was roughly $263 billion.

Upcoming Economic Data Releases

A. Construction Spending

The U.S. Census Bureau will release the latest construction spending data this week. In recent months, residential construction has shown signs of slowing, with persistently high interest rates contributing to the decline. While private construction spending has slowed, public sector construction spending has been the biggest drag. In November, total public sector construction spending was 3.5% lower on a year-over-year basis.

B. ISM Manufacturing Index

The Institute for Supply Management (ISM) will publish its Manufacturing Purchasing Managers' Index (PMI), which provides insight into the health of the manufacturing sector. The manufacturing sector contracted again in December, though at a slower rate compared to November. Demand showed signs of improving, while output stabilized. However, this steady rebound could be disrupted, as tariffs may severely impact U.S. manufacturing.

Mexico and Canada together account for nearly half of U.S. imports and exports of motor vehicles and parts. Major automakers such as Ford, General Motors, and Stellantis have substantial manufacturing operations in both countries, making them particularly dependent on cross-border trade for components like engines, transmissions and other critical parts. The automotive sector will be significantly impacted, as it represents over $60 billion in imports from Mexico and Canada combined.

C. ISM Services Index

The ISM Services PMI will also be released, shedding light on economic activity in the services sector, which comprises a significant portion of the U.S. economy. The Prices Index registered 64.4% in December, a 6.2-percentage-point increase from November’s reading of 58.2%. The Prices Index is worth monitoring, as rising prices could signal a stall in efforts to bring inflation down.

D. Insights from Fed Officials

Federal Reserve Governor Christopher Waller is scheduled to speak this week. In his last address, he expressed confidence that inflation would continue moving toward the 2% target, despite recent slowdowns. He noted that after a period of rapid disinflation in 2022 and 2023, progress appeared to have stalled in the final months of 2024, with core PCE inflation stuck at 2.8%. Analysts will closely monitor his remarks for any updates or shifts in his perspective, especially in light of the newly imposed tariffs and their potential economic implications.

E. January Employment Situation

The Bureau of Labor Statistics (BLS) will release the January employment report, a key indicator of labor market health. Potential disruptions from events like the Los Angeles wildfires may influence the data. In December, job gains were robust, with notable increases in the retail and healthcare sectors. However, wage growth showed signs of slowing. With the private sector quit rate at a 10-year low and the hiring rate at a 14-year low, wage growth is likely to continue moderating.

Looking Ahead

The imposition of new tariffs introduces fresh uncertainty regarding the trajectory of inflation and economic growth. Upcoming data releases will provide critical insights that will help inform policymakers' decisions in the weeks ahead.