Viewpoint

June 06, 2025 | 14:54

Economy Starts to Misfire Even as Tariff Truce Brings Relief

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Our Thoughts

Economy Starts to Misfire Even as Tariff Truce Brings Relief

The economic outlook remains a murky mess, or in Fedspeak: “highly uncertain”. Rapid changes in tariff rates (up and down, on and off) are keeping trade policy uncertainty extremely high (see the doubling of the sectoral steel and aluminum tariff rates this week from 25% to 50%). Still, there has been a temporary and measurable ratcheting down of trade anxiety since “Liberation Day” tariffs were first announced (Chart 1). The May 12 tariff truce between the U.S. and China, and delay in other punitive reciprocal tariffs, has largely bolstered consumer, business, and investor confidence since their April lows. One only needs to look at recent stock market performance to feel the improving vibe. The S&P 500 has gained around 6% and the Nasdaq has climbed even more since the tariff truce was announced.

On another positive note, the personal income and spending report for April, released last Friday, revealed surprising strength and resilience in real disposable personal income growth over the last three months (Chart 2). Not only did it come in well above estimates for April, but we saw sizable upward revisions for March as well. The personal savings rate climbed to a respectable 4.9% from only 3.5% in December. In short, consumers now have a bit more gas in the tank than initially thought. This week, we lifted our annualized real consumer spending growth forecast for Q2 to 2.1% from our prior 1.7% estimate. This is a measurable rebound from the paltry 1.2% growth seen in Q1, but only a partial recovery from Q4’s stout 4.0% pace, illustrating consumers’ more cautious approach to spending today.

Add to the mix near-unprecedented volatility in monthly import and inventory flows as businesses try to front-run and navigate rising tariff rates, and the underlying pace of U.S. GDP growth becomes murkier still. A surge of imports in the first quarter single-handedly lowered GDP growth by a whopping 5.0 ppts and is expected to lift GDP growth by nearly an equivalent amount in Q2 as import growth plunges. On net, our real GDP growth estimate for the second quarter was raised to 1.7% a.r. from 1.0%. Real GDP growth for all of 2025 improves to 1.5% from 1.3% with the Q4/Q4 growth rate improving by three tenths to 1.0%.

Unfortunately, this Q2 strength is somewhat backward-looking as it comes off a strong March and April performance. The view ahead isn’t as sanguine. More recent indicators reveal the U.S. economy is already starting to misfire with the fingerprints of stagflation evident all over the place. The ISM Manufacturing and Services PMIs both fell in May and are now in mild contraction territory (Chart 3), while the prices paid indexes for both surged since the beginning of the year. Initial jobless claims are starting to climb well above their twelve-month average, even as continuing claims remain near recent highs. This dovetails with a weaker-than-expected reading from ADP (a net +37k in private sector jobs) and a payrolls report that revealed net job losses in manufacturing, temporary help, retail trade, and the federal government last month. Lastly, the Fed’s Global Supply Chain Pressure Index revealed some unfavorable news. In May, supply chains faced their highest pressures since August 2024 and the second-highest in nearly 2½ years (Chart 4). For businesses and consumers, the degrees of freedom are narrowing and the squeeze of stagflationary pressures has already begun.