Macro Signposts | 30 April 2025

A Tariff Winter Is Coming?

The adage that policy operates with lags applies to more than just central banks. Trade policy decisions and the related uncertainty they are creating will also affect the U.S. economy over different horizons, from changing secular investment decisions to more immediate effects on markets and consumer behavior.

We think the effects of trade policy changes – which have already led to a surge in imports ahead of tariffs large enough to cause U.S. real GDP to contract in the first quarter – will start to become more evident in the second half of the year and beyond.

Markets seem to reflect the potential for faster trade deals to provide relief from tariff-related challenges, with the S&P 500 (as of this writing) now down less than 2% since the Trump administration's 2 April trade announcements. However, tariff policy is already influencing business decisions today, which will likely create some cyclical disruption even if we see some de-escalation in tariff policy.

These policy-related challenges could leave many U.S. businesses facing cold choices for this year's holiday season: higher prices, lower volumes, layoffs, and slower investment.

Outlook for higher tariffs informs business decisions now
In recent notes, we've argued that the considerably amplified U.S. tariff policy has the potential to cause substantial near-term economic disruptions and possibly a U.S. recession – for details, please read our 16 April 2025 Macro Signposts. (That said, looking longer-term, greater investment in domestic industries and production could benefit the U.S. economy.)

Specifically, we've said that if maintained at current levels – or even if lowered somewhat – tariffs will likely drive a collapse in U.S. imports from China. The surge in imports in the first quarter, ahead of tariffs, will very likely give way to a collapse later this year.

Given production and delivery lead times, purchasing managers have to make ordering decisions for the second half of the year now. This means that ordering for the usual seasonal inventory restocking ahead of the holiday season is already happening under an outlook for much higher import duties. Just how much more companies must charge will depend on how quickly they can pivot to source products from manufacturers outside of China, where they could face a 10% import duty instead of the current 145% duty on the majority of Chinese imported goods.

Higher prices in turn are likely to cut volumes as consumer real incomes are squeezed. Purchasing managers need to consider this as well in their ordering decisions.

These price-related volume declines are not just a potential problem for goods-producing sectors, which import components even if they build and assemble products in the U.S. Services sectors that are built around imported goods commerce will also feel a direct impact. Trucking and shipping, sales and distribution, working capital financing, accounting, and many other business services ultimately rely on the movement and consumption of goods. Major declines in the volume of goods circulating and consumed in the U.S. economy would disrupt these industries, while the real income squeeze is also likely to affect services industries with a more general exposure to consumer discretionary spending. According to executive commentary from recent earnings calls, the leisure and travel services are already starting to feel the effects of the deterioration in consumer sentiment.

The expected volume declines will also affect staffing and investment decisions. Logistics, warehousing, wholesale, and retail categories are usually major drivers of seasonal staffing needs that could be pressured to pull back.

PMI surveys indicate a cold winter awaits
The impact of expectations on economic activity isn't just theoretical. Trade policy volatility and the outlook for higher import duties have already had a notable impact on the aggregated expectations of purchasing managers as reported in regional surveys. Indeed, these surveys reflect growing concerns that in the short run, supply chain reconfiguration won't be easy, leading to higher prices, lower sales, less hiring (or more layoffs), and lower capital expenditures. And historically, comparing changes in purchasing manager expectations to actual economic activity illustrates a clear link: Expectations strongly tend to lead economic outcomes.

In the charts below, we've averaged across the five regional Federal Reserve purchasing manager six-month-ahead expectations surveys of both manufacturing and non-manufacturing U.S. businesses. These survey responses came after the 2 April tariff announcements. We see several takeaways:

Bottom line
Given average industry lead times of one to three quarters on goods ordering, companies are being forced to decide now what products and how much to order for the second half of the year and the crucial holiday shopping season. Whether tariffs remain as currently implemented or are even dialed back, goods orders must factor in expectations of lower seasonal volumes at the new higher prices that must be charged. Lower volumes are likely to coincide with lower staffing needs, even outright layoffs, and ultimately less investment. At least that is what purchasing managers are telling us in their latest surveys.

In other words, unless trade agreements that ease the impact of tariffs can be reached relatively soon and provide purchasing managers with more clarity, a cold holiday season could await. Once ordering based on expectations for higher tariffs is complete, some near-term disruption seems inevitable.

In terms of investment implications, with U.S. equity valuations still elevated despite growing risks to the economy, bonds offer the potential for stable and attractive return opportunities – a way for investors to keep warm amid cold near-term realities of the administration's efforts to reorient global supply chains.

All data in the charts below are drawn from April 2025 regional Fed surveys of manufacturing and non-manufacturing businesses. Source: Federal Reserve Banks of Dallas, Kansas City, New York, Philadelphia, and Richmond; PIMCO calculations.

Figure 1: Business conditions expectations

Figure 1

Source: Federal Reserve, PIMCO Calculations. As of April 2025

Figure 2: Employment expectations

Figure 2

Source: Federal Reserve, PIMCO Calculations. As of April 2025

Figure 3: Capital expenditure expectations

Figure 3

Source: Federal Reserve, PIMCO Calculations. As of April 2025

Figure 4: Prices received expectations

Figure 4

Source: Federal Reserve, PIMCO Calculations. As of April 2025

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