Macro Signposts | 16 July 2025

The Economic Impact of U.S. Tariffs: Waiting, Watching, and Planning

Since January, the Trump administration has imposed broad tariffs - both across-the-board and targeted - with more likely to follow. At the same time, Congress - with the administration's encouragement - has passed legislation to reduce business and household income taxes.

When and how the U.S. economy adjusts to this new regime is still an open question.

Current conventional wisdom is that domestic households ultimately will pay a good portion of the tariffs as businesses charge higher prices to offset the higher cost of imports. In turn, higher prices that reduce disposable incomes are expected to reduce real consumption and weigh on near-term economic activity. Over time, greater incentives to invest domestically could provide an offset.

However, after three months of higher tariffs, data suggest that businesses' pass-through of higher tariffs via higher prices has been slow and uneven. Corporate profits appear to be absorbing more of the additional costs, at least so far. While businesses could still adjust prices and labor costs, which could weigh on aggregate incomes, the post-pandemic surge in corporate margins and the front-loaded tax incentives in the One Big Beautiful Bill Act (OBBB) may prompt more gradual adjustments.

The upshot is that the near-term impact of this year's policy changes - slower growth, higher inflation - could be milder than expected, making it easier for the Federal Reserve to resume its shift toward neutral monetary policy. The downside is that lower corporate profits could lead to tighter financial conditions before the new tax and tariff regime incentives foster the capital expenditures needed for the economy to shift away from its reliance on consumption.

History provides a guide
The scale and scope of the Trump administration's tariff policies are unprecedented in modern times. These policies have already raised the average effective tariff rate that the U.S. currently charges on imports to roughly 11% (from less than 3% in 2024 - see Figure 1), based on Treasury data. In the second half of the year, we expect that number to increase further when additional sectoral and possibly higher reciprocal tariffs are implemented. The closest analog for an industrial economy is the Smoot-Hawley Tariff Act of 1930, designed to protect American farmers and manufacturers from foreign competition. It boosted the effective U.S. tariff rate from less than 10% to about 20%.

Figure 1: The effective U.S. tariff rate has risen dramatically in 2025

Figure 1

Source: U.S. Treasury Department and PIMCO calculations as of June 2025. Effective tariff rate is based on Treasury collections.

Amid these dramatic changes, we, like many forecasters, have made educated guesses on the near-term economic effects based on historical studies of industrialized economies that experienced smaller policy changes. A common theme from these studies is that absent a large offsetting currency adjustment, businesses tend to pass on a good portion of price increases to households, and consumer prices adjust, reducing real disposable incomes. This finding has shaped the current conventional wisdom on how the U.S. economy is likely to behave.

Signals in recent U.S. economic data
While history provides a potential guide, we also have several months of data to signal how the U.S. economy is actually adjusting to this year's tariff policies. Based on observations from various official data sources, we conclude that consumer pass-through has been slower and more uneven across industries. Overall, companies appear to be paying the bulk of the higher tariff-related taxes so far, although there is some evidence of attempts to maintain profits through lower import prices and lower labor cost growth. Consider the following economic data:
Figure 2: Tax revenue suggests companies have borne the brunt of tariffs
Figure 2

Source: Haver Analytics as of 30 June 2025. PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

Forecasting the tariff impact: Insights from current data
What is the outlook for this to continue? Comparing additional tariffs against domestic aggregated profits reported in the National Income and Product Accounts (NIPA) suggests that tariffs could result in a large one-time hit to corporate profits if fully absorbed. According to NIPA, the estimated $350 billion in annualized tariff revenue equates to around 11% of after-tax profits, or 9% of pre-tax profits.
However, the post-pandemic surge in margins argues for some room for businesses to absorb near-term costs. A full absorption would lower economywide corporate margins by around 2 ppts, back to pre-pandemic levels, according to NIPA data (see Figure 3).

Figure 3: U.S. corporate profit margins under different tariff pass-through assumptions
Figure 3

Source: U.S. National Income and Product Accounts (NIPA) as of Q1 2025

The One Big Beautiful Bill Act's inclusion of retroactive business income tax cuts should offset some tariff-related costs for the aggregate business sector in 2025, and could also enable businesses to continue to adjust more slowly to tariff policy. That said, the companies most affected by tariffs probably aren't the companies that stand to benefit most from the OBBB.

Legal questions further complicate the tariff outlook, and this means larger businesses able to weather the near-term corporate margin hit could continue a gradual pace of tariff-related adjustments. In May, the U.S. Court of International Trade (CIT) found that President Donald Trump's use of the 1977 International Emergency Economic Powers Act (IEEPA) to implement sweeping tariffs exceeded the law's authority. The Supreme Court could rule on the case later this year. Should the Supreme Court uphold the CIT's decision, the Treasury might need to refund all collected tariff revenue. The Trump administration could pursue alternative tariff measures under Section 301 and 232 investigations, which are more resilient to legal challenge, but require additional time.

For the Fed, evidence of slower pass-through that may mitigate peak inflation has to be good news, even if somewhat higher goods inflation is more persistent beyond this year.

U.S. households could be relatively better off if the higher burden of tariffs compounds gradually over time. However, there's also a risk that near-term corporate profit weakness to surprise investors and tighten financial conditions before longer-term investments can be made.

Catch up on recent editions of Macro Signposts:

Not yet subscribed? To receive Macro Signposts each week, please sign up here. Macro Signposts highlights weekly takeaways from the data analysis conducted by our team of economists and other macro experts. For PIMCO's official views on the global economy, please visit pimco.com.

We welcome your questions about the global macro landscape. Don't hesitate to suggest themes or data for us to analyze and discuss: Please email [email protected].

For regular insights on U.S. policy via email, please sign up here to receive PIMCO Washington Watch from Libby Cantrill, head of public policy.

All investments contain risk and may lose value.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) is authorized and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Via Turati nn. 25/27 (angolo via Cavalieri n. 4) 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain), PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50-52 Boulevard Haussmann, 75009 Paris, France) and PIMCO Europe GmbH (DIFC Branch) (Company No. 9613, Unit GD-GB-00-15-BC-05-0, Level 15, Gate Building, Dubai International Financial Centre, United Arab Emirates) are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively, (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF and (6) DIFC Branch: Regulated by the Dubai Financial Services Authority ("DFSA") (Level 13, West Wing, The Gate, DIFC) in accordance with Art. 48 of the Regulatory Law 2004. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 ("CISA"), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015. The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2025, PIMCO.

CMR2025-0716-4670668