The U.S. economy has signs of strength, but that’s been caused by seesaw movements of inventories and net exports pushing the real Gross Domestic Product growth pace up 2.5% from the first quarter to the second quarter.
But as the Research Seminar in Quantitative Economics (RSQE) at the University of Michigan put it in its recently released report:
“Under the hood, however, the economic growth engine is sputtering.”
It seems companies, in anticipation of tariffs, have been buying goods before the taxes on imports go into effect. That ends when tariffs do take effect.
The forecast notes that while several trading partners have agreed to tariff rates of around 15%, with Canada and Mexico to also end up at or close to that rate, China is a different story.
The economists think the eventual level of tariffs on China’s goods will be about 50%. That’s about 40% higher than now. China is the country's third largest trading partner, and a lot of what Americans buy at big retail outlets comes from China.
What that means for inflation, and ultimately what it means to the Federal Reserve in its decisions on interest rates, is not at all certain.
The July jobs report brought an unexpected chill to the peak of summer. As seen in the chart below, payroll job gains for the month and revised numbers for previous months pulled the three-month average down. A White House response to that data was to fire the head of the U.S. Bureau of Labor Statistics.
What that will mean to the future reliability of the BLS reports is yet to be seen.
In an earlier report, the economists reported that Michigan’s economy has been fairly strong this year, but that trend is expected to slow for the rest of this year. The good news is that economists at the University of Michigan forecast some moderate growth in 2026 and ’27.
More modest growth over the next two years could amount to close to 19,000 jobs added. However, that growth is expected to be primarily in private education and health services, leisure and hospitality and in the government sector. Jobs affected in businesses will be mostly flat. The economists note that there’s a lot of uncertainty in their estimates.
One of those uncertainties in the both the U.S. and Michigan economic futures is how tariffs will play out. Some countries are negotiating with President Donald Trump and reportedly making progress. However, there likely will be some effect on prices for some goods.
Negotiations with China are expected to result in much higher tariffs. That will mean electronics, appliances, clothes, furniture and other goods that are commonly sold in big box stores will be significantly higher. Most of the outlets have already eaten some of the additional costs of tariffs. That cannot continue forever.
The auto sector tariffs along with those on steel and aluminum could mean some significant job losses.
The economists forecast the regional inflation rate to moderate to 2.1% this year, but inflation picks back up in 2026 and ’27 as tariffs put upward pressure on prices. Local inflation could hover around 3% to 3.5%.
Personal income grew at 5.1% in 2023 and then dropped to 3.9% growth in 2024.
Although people are bringing home bigger paychecks, the real disposable income has been increasing at a much slower rate. That means less increase in spending power.
The economists note all-in-all since 2019 things could have been worse since we saw some growth "in a challenging period characterized by a hefty degree of policy uncertainty.”
