Trade wars are dying down, but the U.S. economy is still licking its wounds

By Jeffry Bartash

A weak job market and slumping manufacturing are casualties of higher tariffs

Businesses see high U.S. tariffs as leading to higher costs, weaker sales and lower profits.

Higher wine prices hurting restaurant sales. Soaring coffee costs shrinking roaster profits. Brewers charging extra for beer because hops, grains and aluminum are more expensive.

These are among the many challenges faced by businesses across the country as they try to adjust to the constantly shifting tariffs imposed by the Trump administration.

Although the trade wars have died down, they have not disappeared. And that has left an air of uncertainty over the economy eight months after higher U.S. tariffs began to be put in place. And that uncertainty, economists and business leaders say, is unlikely to go away soon.

The fallout from the trade wars has shown up the most in a deteriorating labor market. Very few businesses are adding jobs, people are remaining unemployed for longer and the jobless rate has crept up to a nearly four-year high of 4.3%.

The White House is still negotiating deals with some large countries such as China. President Donald Trump has abruptly raised or lowered certain duties, at times without warning. And now it's possible the U.S. Supreme Court could intervene and curb the president's power to authorize tariffs.

So what are businesses going to do?

"Sometimes you just need to sit back and watch," said Steve Miller, chair of the Institute for Supply Management's survey of U.S. companies on the services side of the economy.

How good is the economy?

By some measures, the economy still pretty good.

Gross domestic product, the official measure of growth, expanded at a frothy 3.8% annual pace in the second quarter. Third-quarter GDP was also expected to be strong before the government shutdown delayed the report.

Surprisingly robust GDP reflects stable consumer spending - the main engine of the economy - as well as a massive surge in business investment in artificial intelligence.

Yet the overall trends in consumer spending and business investment mask deeper problems in the economy. Let's start with consumer spending.

The increase in spending this year has been led by richer Americans with household incomes of $100,000 or more. These families have especially profited from record stock-market gains - or what economists refer to as the "wealth effect."

Middle- and lower-income families, on the other hand, have had to mind their money because of steadily rising inflation.

The Trump tariffs haven't raised inflation as much as predicted, but the cost of living is still on track to go up 3% this year, putting more strain on household budgets. That's on top of a spike in inflation from 2021 to 2024.

Making matters worse, a weakening labor market means it's much harder for people who are laid off to find work. The economy has barely added any new jobs since late spring, and now more big companies such as UPS (UPS) and Amazon (AMZN) are laying off hundreds of employees.

Anxiety over the economy is clearly influencing how people spend.

Fast-food chain McDonald's (MCD), for example, said this week that traffic to its stores from low-income customers fell sharply in third quarter, while it attracted more middle-class people looking for cheaper meals.

Pizza giant Papa John's (PZZA), meanwhile, said sales at stores open at least a year fell in the third quarter as customers downsized to medium pizzas and added fewer toppings.

Economists refer to the divide among consumers as the "K-shaped," "two-speed" or "bifurcated" economy.

There's also a big divide in business.

Tougher times

Highly profitable technology giants such as Google (GOOGL), Meta (META) and Microsoft (MSFT) are racing to become leaders in artificial intelligence by spending huge sums on software and computer chips, benefiting suppliers such as Nvidia (NVDA).

The splurge in AI aside, most businesses aren't investing as much as they were a few years ago. The biggest pullback has taken place among manufacturers that have borne the brunt of tariffs.

Most manufacturers bought extra supplies before the trade wars flared up. The move to stock up allowed them to keep prices down on cars, appliances and other goods produced before the new tariffs went into effect. And customers snapped up those goods to beat the tariffs.

It's a different story now.

Supplies cost more, in some cases a lot more, but customers are resisting price increases when manufacturers try to pass the cost of tariffs on to them. So companies are facing higher costs, weaker sales and lower profits.

"Tariffs continue to be a large impact to our business," a senior executive at a machinery manufacturer told ISM. "We are trying to keep up with the wild fluctuations and pass along what costs we can to our customers."

The damage isn't over, either.

Many companies say they plan to try to pass some of the cost of tariffs on to customers once they know exactly how much they will have to pay, and on what. That could keep the rate of inflation at around 3% for a while.

"My outreach to business leaders suggests that the pass-through of tariffs to consumer prices is not yet complete," said Federal Reserve governor Lisa Cook. "As such, I expect inflation to remain elevated for the next year."

The Fed has cut a key U.S. interest rate twice since September to shore up the economy and prevent a further rise in unemployment. But lower interest rates alone probably aren't enough to offset the financial drain of tariffs, business leaders say.

The Fed's latest survey of the economy found a flood of complaints about tariffs from companies in every part of the economy, including restaurants, retailers, banks, home builders, car dealers, coffee roasters, brewers and furniture makers.

When will it end?

Not until the Trump administration signs off on most major trade deals with key trading partners such as China, Mexico and Canada, economists and business leaders say, and some semblance of normality is restored.

"Tariffs are weighing on everything," said Susan Spence, head of the ISM survey of manufacturers. "It all needs to settle down."

-Jeffry Bartash

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-07-25 0700ET