Dom’s Quick Take: Peak Tariff Anxiety Now?

Summary

• With the new USTR now fully in place, and with the Trump administration aware it needs more disciplined policy messaging, tariff policy is about to become more process driven.
• This could restore some private sector confidence and spending because the drama and chaos over tariff policies has exaggerated the importance of the manufacturing sector.
• The US is a services-driven economy. Higher tariffs will do little damage if they are implemented in a gradual and predictable manner.

Market Implications

• We are seeing the more rational policy implementation required for me to keep my call of no cuts in 2025.
• I will change my call if the administration does not restore private sector confidence within the next few weeks.

Tariff Policy to Become More Process Driven

One key reason for the negative impact of tariffs on consumer and business confidence is their implementation, which has led to surging uncertainty. This is partly because Jamieson Greer, the USTR, was only confirmed on 26 February so there was no one to rein in President Trump. Now Greer wants to reassert control and follow process. As this Bloomberg article makes clear, he has a formidable ally in the person of Susan Biles, the White House chief of staff, probably the ablest Trump channeler in the world.

In addition, Trump’s economic team realizes more disciplined policy implementation is needed and are strategizing for 2 April, the planned implementation date for reciprocal tariffs. Behind the scenes, Treasury Secretary Bessent and Economic Council Director Kevin Hassett are also pushing for quick implementation of market friendly policies, such as tax cuts and deregulations.

This news follow Tesla sending a letter to USTR last week warning the company is vulnerable to retaliatory tariffs. While the letter was unsigned it is unlikely to have been sent without Elon Musk’s consent and signals the president’s economic team is looking for more rational tariff policies.

Tariff Uncertainty to Fall

If Trump can be more disciplined in his policy messaging, we could see a turnaround in private sector confidence and spending. This is because the drama and chaos around tariff policy announcements have led to an exaggerated perception of manufacturing importance.

Tariffs will have little impact on private employment. Manufacturing represents only 14% of GDP and 9% of private employment. February 2025 manufacturing employment was 1% below its November 2022 peak (the highest since the GFC). By contrast, over that same period private employment excluding manufacturing grew by 3% and the economy did very well.

Core goods represent about 20% of consumer spending (28% including food). So, tariff increases are going to eat into consumer income, but we do not know by how much yet. However, the administration’s immigration and competition policies are likely to support faster growth in wages, especially low wages, than in prices. This could eventually make up for the decrease in real incomes caused by the tariff hikes.

I think the administration is mistaken in thinking a manufacturing renaissance is needed to produce higher paying blue-collar jobs (or is targeting the defense industry rather than blue collar jobs). The very few new manufacturing jobs that are created require STEM degrees. However, the limited economic importance of manufacturing implies higher tariffs may do less economic damage than the loss of business and consumer confidence suggests.

Market Consequences

Time still exists for the administration to refocus its economic messaging and plans and restore consumer and business confidence. That is why I have not changed my Fed call for no 2025 cuts.

Yesterday’s Bloomberg article suggests the administration is moving in the right direction. It remains uncertain if it will do enough promptly to restore confidence and keep the economy on the high growth path prevailing before inauguration. If not, I will change my Fed call.

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