Why Tariffs Haven’t Crushed the U.S. Economy (Yet)

Archive edition · Market data and company circumstances reflect 4 October 2025, when this newsletter was sent.

The Tariff Shock That Wasn’t

When the White House declared broad import duties on April 2, now infamous as “Liberation Day”, markets reacted as if a new trade war had begun. Analysts warned of runaway inflation, collapsing growth, and consumer panic.

Six months later, the U.S. economy is weaker but still far from broken. Inflation has edged up to 2.9%, GDP growth is softer, and financial markets have calmed down. The reality is that tariffs are acting more like a chronic illness than a sudden heart attack.

The question for investors is whether this resilience can continue or if the delayed effects will bite harder in 2026.

Tariffs Are Lower in Practice Than on Paper

Officially, tariffs are supposed to average 17%. In reality, companies are paying closer to 11% today.

That gap exists because firms are actively finding ways around tariffs:

While tariffs will likely settle closer to 15% once inventories are cleared and exemptions expire, the lag explains why the economy has not been hit as hard, yet.

For investors, this means:

• Front-running imports: Many companies pulled forward shipments ahead of tariff enforcement, meaning much of 2025’s consumption still comes from pre-tariff inventories.
• Legal and bureaucratic maneuvers: Corporates have filed thousands of exemption requests. For example, automakers like Ford ($F) and General Motors ($GM) have quietly lobbied for component carve-outs.
• Rerouting trade: Tech companies such as Apple ($AAPL) and Dell Technologies ($DELL) have shifted parts of their supply chain through Mexico and Vietnam to minimize tariff exposure.
• Margins are being protected temporarily. Reported earnings in Q2 and Q3 2025 show many manufacturers beating expectations.
• But risk is deferred, not eliminated. As tariff avoidance gets harder, costs will creep into P&Ls in 2026.

Rule of Thumb Proves Right

Economists often use a simple rule:

1% increase in tariffs = +10 bps inflation and -5 bps GDP growth.

Applying that math: With tariffs up ~9 percentage points (from 2% to 11%), the implied effect is +0.8% inflation and -0.4% GDP growth.

And indeed, that is close to what we have seen:

For investors, the important lesson is that the economy is weaker, but not collapsing. Tariffs have delivered a manageable drag, rather than the full-scale recession some feared.

• GDP: Consensus forecasts for 2025 growth are now ~0.6 percentage points lower than before Liberation Day.
• Inflation: Core CPI has ticked up to 2.9%, with food, auto parts, and consumer electronics leading the gains.
• Retailers like Walmart ($WMT) and Target ($TGT), who face higher import costs on consumer goods.
• Industrial manufacturers like Caterpillar ($CAT), heavily dependent on global supply chains.
• Chipmakers such as NVIDIA ($NVDA) and Advanced Micro Devices ($AMD), exposed to cross-Pacific component flows.

The “Slow Burn” of Rising Prices

Unlike a sudden shock, tariffs are seeping into consumer prices slowly, creating a steady but noticeable drag. Tariff revenue has jumped sharply, from about $6–8 billion a month before April to nearly $30 billion in August 2025, translating to an annualized $354 billion boost to Treasury coffers.

Companies, however, are uneven in their responses: Some are holding off on price hikes, others are cushioning the impact with promotions, and many are still betting that tariffs will prove temporary rather than permanent.

This creates two dynamics:

• Consumers have not felt the full squeeze yet. Big-box stores like Costco ($COST) and Dollar General ($DG) are still absorbing some of the hit, though analysts expect Q4 price adjustments.
• Inflation could climb further into 2026. Once pre-tariff inventory is depleted, cost pass-through will accelerate.

Negotiations Will Decide the Next Move

The tariff story is far from over. Key developments on the horizon:

The real risk is volatility in headlines: Tariff tweets may not spark panic as they did in April, but they will continue to whipsaw certain sectors, especially semiconductors, autos, and retail.

• USMCA renegotiation in 2026: Both Mexico and Canada are bracing for tough talks, as Washington pushes for alignment on tariffs against China.
• Mexico already raising tariffs: Recent hikes on Chinese autos show Mexico is moving in step with U.S. policy. Automakers like Tesla ($TSLA), which produces cars in both the U.S. and Mexico, are watching closely.
• China remains central. U.S.–China trade tension is unlikely to fade. Companies such as Apple ($AAPL), Nike ($NKE), and Qualcomm ($QCOM) remain particularly exposed.

Trade Flows Are Changing

The most important takeaway for long-term investors: Globalization is not dead, it is changing.

• World trade volumes remain steady, even as U.S. trade policy shifts. Non-U.S. trade flows show no slowdown in 2025.
• Supply chains are being redrawn: Vietnam, India and Mexico are emerging as beneficiaries of “China +1” strategies.
• Logistics players like Maersk ($AMKBY) and FedEx ($FDX), who profit from rerouted trade.
• Emerging market ETFs ($EEM, $VWO), particularly those tilted toward India, Vietnam and Mexico.
• U.S. manufacturing reshoring plays, including industrial REITs like Prologis ($PLD) and automation firms like Rockwell Automation ($ROK).

Archive note

This article preserves the analysis in our weekly newsletter sent 4 October 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.