The U.S. economy has been showing resilience to tariffs so far, but will be increasingly pressure tested going forward under the weight of multiple tracks of tariffs. Tariffs, especially the very high 145 percent levy on imports from China, are about to start hitting even more goods; tonight is the deadline for the so-called de minimis provision to end. Under de minimis rules, small packages of $800 or less imported from China to the U.S. are exempt from tariffs. This provision has meant that e-commerce retailers that sell clothing and other goods online directly to U.S. consumers were able to do so without being affected by tariffs. Over 1.25 billion shipments entered the U.S. in 2024 under the de minimis provision, and its end will mean price increases for a wide swath of consumers. Some of the most affected companies, such as Temu and Shein, have already indicated  some changes to their operations because of the change to de minimis rules; these changes could include price increases for customers, shifting some of the sourcing for U.S. sales away from China, and as a consequence possibly seeing their U.S. business shrink. These measures are set to occur as progress on removing tariffs remains elusive, though we did see indications of a willingness to negotiate from both China and the EU late this week. 

We long expected that roll-out of U.S. tariffs would create distortions in the data, notably the natural response of many U.S. businesses and consumers to get ahead of the higher levies. This week’s advance estimate of U.S. GDP growth for the first quarter of 2025 confirmed our expectation – U.S. GDP shrank in the quarter, weighed down heavily by a massive surge in imports ahead of tariffs being put in place, much of the import surge seemingly for companies to stockpile inventories. Inflation was also up for the quarter, but March showed some slowing from earlier in the year. Recent inflation readings are still above the Federal Reserve’s target, however, so we expect this mild softening to be received with great caution.

The vast majority of tariffs were put in place after April 2, so all of this data is just a warm-up, so to speak. Most of this 1st-quarter data is warped by expectations of tariffs in the future, rather than being an indication of underlying trends. The real question of how  economic activity is holding up is going to come through the data after April 2. This morning’s jobs report for April, the first such data, was surprisingly resilient, and the unemployment rate remained unchanged at a fairly low 4.2 percent. We also saw April data for vehicle sales this morning come in strong, in part because dealers still have inventory that predates the auto tariffs. But that is still two points of hard data showing that activity did not take a big hit in April. 

This week leaves us back in wait-and-see mode, as we have still seen very little data since tariffs were put in place. The economy has to pass through another deadline for tariffs to kick in tonight, and those will also take some time to filter through the economy. The Federal Reserve is set to meet next week, and we expect the central bank is still searching for more clarity on the outlook before contemplating rate cuts.  Futures markets had been holding out hope for a June cut, but after today’s jobs report, odds have been dialed back to around 40%.  However, given the expectation that a weaker economy will ultimately trump higher inflation as the Fed’s number one concern, investors are still anticipating between 3-4 cuts by year-end.