As more tariffs officially kick in, the economic outlook remains on an uncertain path

As a significant portion of the United States’ tariffs placed on global trading partners take effect today, a heavy amount of speculation and uncertainty (there is that word again), remains intact on the global trade front.

While some mainstream media publications have cited how since tariffs that were already implemented prior to today have helped spur reductions in the U.S. trade deficit and also brought in revenue to the U.S., there are industry stakeholders that maintain that may not become a permanent trend, especially for the latter. A key reason for this is related to major front-loading efforts on behalf of shippers to get cargo into the U.S. ahead of implementation dates for tariffs to take effect, which, in some cases, has been a moving target, of sorts, given that stops and starts and pauses for tariffs on certain countries, like Canada, Mexico, and China, for example, among others. What’s more, there is consensus, to varying extents, that the tariff-driven revenue gains, to date, may be short-lived, as many U.S.-based companies have yet to raise prices, in order to cover the costs of the tariffs.

A common refrain among industry stakeholders has been that they know tariffs are coming, or have already arrived, but they badly want, and need, some clarity and stability on tariff rates in order to effectively take action, as it relates to a whole host of things, including: operations; sourcing and procurement; inventory management; capital expenditures; and hiring and staffing, among many others.

Well, it is clear that is not the case yet, but could it be? Given the aforementioned ongoing moving parts and pauses, that is unclear, at least for now. What is more likely is that at some point in the future—whether it is six months, 12 months, or more, from now—that industry stakeholders could see some needed stability and predictability in their supply chain operations and planning, making things more efficient and fluid than they are at the moment.

In a recent interview, Matt Muenster, Chief Economist for Green Bay-based Breakthrough, said that with the White House moving forward with its reciprocal tariff actions on the majority of U.S. trading partners, tariffs are likely to continue uncertainty moving forward throughout the economy, firms, and supply chains. And he added that it comes at a time when second quarter GDP growth was positive, but the July jobs report that suggests there are cracks growing in employment that will present headwinds moving forward.

“The first iteration of the tariffs and uncertainty led to sizable front-loading and inventory build-ups, as noted by the run-up in private inventories of over $200B in the first quarter, followed by the decline of $30B in the second quarter, according to the latest BEA GDP release,” said Muenster. “We don’t anticipate a wide-scale inventory build-up. Beyond inventory moves, many firms have taken a ‘holding pattern approach,’ which we see in the form of slowed residential and nonresidential investment growth in the GDP data, as well as positive, but declining employment numbers in the latest job report.” 

This pattern is consistent with the Breakthrough data, according to Muenster, where overall shipment volumes have remained relatively flat year-over-year, although with some industry variation, and truckload linehaul rates continue to remain stable near their lows in this freight recession period.

For markets tied to the southern border, the reprieve for Mexico maintaining rates for another 90 days may provide less freight market disruption, bit it comes with the caveat that it is also complicated by the uptick in English Language Proficiency (ELP) violations placing drivers out-of-service—which is notable in states like Texas, he said. Based on FMCSA data, Muenster said Breakthrough is seeing the ELP violations remove 200-to-400 drivers per week since stringency increased at the end of June.

Up North in Canada, he said that the continued trade challenges with Canada—bumping the tariff rate up to 35% on non-USMCA goods, in addition to the previous tariff changes on energy, lumber, and the automotive sector—are likely to continue to put pressure on the durable goods sector, where there have seen declining freight volumes in the Breakthrough ecosystem over the past several months.

“The recent tariff changes have further complicated an already uncertain economy,” said Muenster. “Consumers remain resilient despite their lack of confidence, and the housing market remains stagnant. Companies are adopting a wait-and-see approach, while the Federal Reserve is maintaining steady interest rates. Inflation is moderating, although some tariff-related increases are starting to appear. Meanwhile, the freight market recession persists. The movement of volumes in the coming quarters will depend on how various stakeholders adapt to these evolving dynamics.”

While most economic benchmarks are currently showing that things are not in the red, that could end up being viewed as a moment in time, perhaps. Many estimates indicate that it takes six-to-18 months, or even longer, to see the full impact of tariffs on the economy—at which point the economy could be booming or it could be suffering. Clearly, the former is preferred, but it is going to take some time to sort out.