As others spread doom and gloom or pie in the sky, FTR has held off on crafting major changes to our economic forecasts based on tariff fallout, mostly because of uncertainty. The uncertainty continues, but tariffs are taking a clear toll.
Since the election, we had not incorporated tariff assumptions into our economic forecasts because we did not know the full scope. Proposals were varied and quite onerous, but the actual imposed tariffs were fairly modest – until recently.
Through February, only a 10% tariff on imports from China had been imposed. March saw an additional 10% on Chinese imports, a 25% tariff on around half the goods imported from Mexico and Canada, and a 25% tariff on steel and aluminum imports worldwide. A tariff on imported autos and light trucks announced in March took effect April 3.
The big question was what President Trump’s reciprocal tariffs would look like. Shortly after they were released, we incorporated the Liberation Day tariffs into our economic assumptions but had to revisit the forecast due to the “90-day pause.”
The pause reduced tariffs to the 10% base for many trading partners, but the escalation of tariffs on China – the No. 2 exporter of goods to the U.S. in 2024 – ultimately more than offset that “relief.” The result? No real change to our initial forecasts.
The tariff picture keeps changing, of course, as Trump already has exempted – at least temporarily – smartphones and computers and has floated putting off planned tariffs on key automotive parts. We will consider changes as part of our normal process for assessing the economic outlook.
The discussion that follows outlines how our forecasts for real Gross Domestic Product and the GDP Goods Transport Sector – the portion of the economy linked to freight transportation – have changed as well as key assumptions regarding tariff impacts and forecasts risks. Revisions reflect routine changes in underlying data, but tariffs account for most of the forecast change. More detailed data on our forecasts, including those for industrial production and other key components of GDP, will be published with our monthly reports as usual.
FTR now forecasts annual real GDP growth of 2.0% in 2025, down from 2.8% growth in 2024 and from the prior forecast of a 2.3% y/y increase. Our forecast for GDP Goods Transport is a 0.9% increase in 2025, down from 3.2% in 2024 and a prior forecast of 2.0%. The current and prior GDP and GDP Goods Transport forecasts for 2025-2027 are provided in the table below.
The reason that the change in our near-term forecast for the overall economy – i.e., real GDP – is not as large as the change to the GDP Goods Transport Sector forecast is quite straightforward.
Imports are calculated as a negative factor in GDP, so reduced goods imports after tariff implementation partially offset the effects of tariffs on inflation and employment. Because GDP Goods Transport counts imports as a positive for freight, weaker imports for the rest of 2025 exacerbate the impact.
By 2027, the presumed normalization of imports has the opposite effect, working against GDP but boosting GDP Goods Transport slightly.
The inherent volatility of imports due to the imposition of tariffs results in a rather choppy quarterly progression in our economic forecasts. For overall GDP, we do not forecast any negative quarters, but growth is weaker in Q2 and Q4 in part because we expect imports to be stronger in those quarters for the reason discussed below.
While the annual forecast for GDP Goods Transport remains slightly positive, that outcome is largely due to activity that has already occurred. A 2.2% annualized increase quarter-over-quarter (q/q) in Q1 is the largest of the year.
The current quarter is forecast at a 0.8% q/q annualized decrease, but the real hit comes in the third quarter. FTR’s forecast for GDP Goods Transport for Q3 is a drop of 3.5% annualized.
The biggest reason why Q3 takes that hit rather than Q2 is that tariffs are imposed based on when goods are loaded onto vessels for transit, which means that even though all announced tariffs were in place by early April, ocean transit times will delay the full effects on imports until late in Q2. Even goods leaving port before the deadline must be in the U.S. by May 27 to avoid tariffs.
Imports are not the only issue, however. As discussed below, some of the broader negative economic impacts from tariffs will not be immediate but rather will build during 2025.
Our revised forecasts are based not on what our analysis indicates would be the maximum impact of tariffs but rather what we consider to be a more realistic assessment of the probable outcome.
Our analysis of Census Bureau data concludes that the “Liberation Day” tariff schedule would increase the effective tariff rate to 24.4% from 2.3% in 2024. The 90-day pause reduced the impact for most of the world, but the escalation of tariffs on China to 145% meant that the effective tariff rate rose to 29.7% with an inflationary impact of 3%.
However, we expect not only pullbacks as have happened already but also negotiations between the U.S. and individual trading partners. Therefore, our forecast assumes an overall tariff rate of about 21%.
The most immediate impact on our economic expectations concerns inflation. Using the Federal Reserve’s estimate that 10% of consumer spending is attributable to imports, tariffs could add 2 or 3 percentage points to inflation.
After hovering around 3% over the first three months of the year, we now expect the Consumer Price Index (CPI) to rise sharply during 2025, hitting a peak rate just above 7% before slowing decelerating through 2026.
As of now, we assume that the CPI will be up 3.9% in 2025. Even with steady declines, the fact that 2025 began at a more moderate level means that the CPI still will be elevated for all of 2026 at +4.2% y/y. By 2027, we expect inflation to return to a level we have become more accustomed to at +2.9%.
Given that we have been dealing with inflation for several years at this point, the implications are clear. For example, we expect continued “higher for longer” interest rates from the Federal Reserve, putting downward pressure on the prospect of both industrial and residential investment.
The Fed’s mandate to keep inflation low, however, conflicts with its mandate to promote job growth. With hot inflation on top of high interest rates and already-soft economic expectations, unemployment likely will rise.
In March, the U.S. unemployment rate was 4.2%. We expect unemployment to move higher through 2025 and peak above 5% in 2026. Unlike inflation, the unemployment rate is expected to remain elevated for much longer, not falling back down to the current unemployment rate until the end of 2027.
The risks for a recession are notably higher when we are entering periods of slowing growth, and the current economy is no exception. Perhaps the more concerning element is the potential for that dreaded undesirable mix called “stagflation” – limited economic growth coupled with elevated inflation. A recession would most likely temper the inflationary aspects, but an economy that continues to grow very slowly but has high inflation levels has very few tools to combat those measures.
In addition to the risks for much slower growth in the near term, the potential outcomes for 2026 and 2027 likely will skew more towards the “tails.” That means that the economy isn’t likely to revert to average growth. Recovery likely will be either weaker due to the current pressures or much stronger than usual as the economy makes up for the lack of investment in 2025. Don’t anticipate a “status quo” result any time soon.
Our baseline forecast views tariffs as a transitory impact on pricing. A tax is added, prices shift, and the market normalizes at the new price. However, the tariff isn’t only a tax; it is also a supply chain disrupter! We all understand too well what happens when you have sustained supply chain disruptions. The pricing pressures can be extraordinary and the effects last longer than anticipated.
This doesn’t mean that inflation will go gang- busters for several quarters, but be prepared for elevated inflation for a much longer period of time.
And what about the theory of some near-term pain for a long-term gain? We don’t buy it. Not based on business or consumer sentiment. If businesses aren’t eager to invest in reshoring due to uncertainty over the playing field once those investments come due (in two to five years), then the long-term gains won’t materialize and we only get the near-term pain. But that pain lasts longer and has notable downside risks to long-term growth.
What about these persnickety consumers, i.e. us? We can’t forget the political realities of the situation. Any administration has less than two years to show results or the tide can turn quickly. If consumers are feeling the brunt of higher prices and higher unemployment, then the political realm will quickly shift. You may or may not like that result, but it means that uncertainty around trade will likely persist longer than any of us want.
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