Macro Signposts | 17 September 2025

U.S. Labor Markets: A Release Valve for Tariff Pressure?

The Trump administration's tariff policies have raised the effective average U.S. import tariff from under 3% in 2024 to approximately 11% actually being paid today - a jump not seen since the 1930 Smoot-Hawley Act. (Data source is the U.S. International Trade Commission or USITC.)

With so little precedent of tariff hikes on this scale, we've relied on historical studies of smaller policy shifts in industrialized economies to estimate near-term effects. This analysis suggests that without a major currency adjustment, businesses typically pass price increases onto consumers, which in turn tends to reduce real disposable income.

While this finding is a helpful starting point, now that we have more months of concrete economic data, we are gaining a better understanding of the transition taking place in the U.S. economy.

In our 16 July 2025 edition of Macro Signposts, we analyzed various data sources that suggested corporate profits appeared to be absorbing the bulk of the additional tariff costs. Data released since then have changed that picture somewhat. Although price pass-through has still been slower and more uneven than history would suggest, it now looks like many companies have managed this transition through careful management of other costs, including labor costs, which has allowed them to maintain profits.

Regardless of whether the economic adjustment is due to labor cost declines or price level increases, the impact on real household incomes would tend to be negative in aggregate. However, the distinction between those two economic drivers matters for inflation expectations and monetary policy: A milder price level adjustment paired with greater labor market impact could widen the scope for Federal Reserve rate cuts and accelerate a return to neutral Fed policy, which is estimated to be around 3% (based on the Fed's median long-run rate projection released in June).

Indeed, recent labor market data are enough to tip the scales in favor of cutting interest rates despite still above-target core PCE (personal consumption expenditures) inflation.

Corporate profit data highlights how companies are coping
According to the U.S. National Income and Product Accounts (NIPA) published by the Bureau of Economic Analysis (BEA), U.S. corporate profits held up remarkably well in the second quarter despite one of the largest tariff hikes in a century. Data from 2Q equity earnings suggest that rising profit margins for larger companies have helped offset declining margins for smaller companies. In aggregate, companies have defended profits despite limiting end-user price adjustments by managing labor costs (and, to a lesser extent, other costs).

A closer look at the details of NIPA profits suggests that higher volumes drove some of this performance; the economy was still benefiting from a surge in activity ahead of tariffs, which lifted service industry production connected to trade. However, on a per-unit basis, corporate profits of nonfinancial businesses were up 1.8% in the second quarter, despite a 7.5% quarterly annualized increase in production and import costs from tariffs.

Companies in aggregate defended their profit margins by increasing prices somewhat, according to the same dataset. Per-unit prices within the business sector increased roughly 1% annualized. However, the large offset was a 2.3% decline in labor costs. Figure 1 breaks down the reported change in corporate prices in the second quarter by changes in labor and non-labor costs, and profit margins.

Figure 1: Data suggest U.S. companies reduced labor costs to help limit tariff-related price increases

Figure 1

Source: National Income and Product Accounts (NIPA) table 1.15 (published by the U.S. Bureau of Economic Analysis, part of the Commerce Department), Haver Analytics, and PIMCO calculations as of 2Q 2025

While one never wants to overemphasize one quarter of data that has a tendency to be revised, the NIPA data in Figure 1 do jibe with other sources. Based on analysis of consumer price data from the U.S. Bureau of Labor Statistics (BLS) and the Commerce Department, we estimate that price adjustments, on average, have offset around 30%-40% of the tariff costs thus far in 2025 (see Figure 2) - slightly below the reported 50% pass-through implied by the NIPA data in 2Q.

Figure 2: U.S. companies have been passing less than half of tariff costs onto consumers thus far in 2025

Figure 2

Source: U.S. Commerce Department, Input-Output accounts, U.S. Bureau of Labor Statistics (BLS) consumer price data, tariff rates from the U.S. International Trade Commission (USITC) database, PIMCO calculations as of July 2025

This is also slower than the rate of pass-through witnessed after washing machine tariffs were implemented in 2018, for example. Import price data still suggest a small offset is probably coming from price reductions by foreign producers.

Recent labor market data also support this analysis. The BLS's newly released preliminary revisions to reported employment by establishments suggest that for the trailing four quarters ended March 2025, actual employment was over 900,000 below initial reports. There are good reasons to believe that the establishment survey is still overestimating payrolls, which implies the six-month moving average of monthly changes could be closer to flat (versus the currently reported 64,000 - see Figure 3) and also implies the three-month moving average of monthly changes could actually be down 30,000.

Figure 3: Notable downward revisions to U.S. payrolls data suggest companies may be trimming labor costs

Figure 3

Source: U.S. Commerce Department, BLS Quarterly Census of Employment and Wages (QCEW) and Current Employment Statistics (CES), Haver Analytics, and PIMCO calculations as of August 2025

It's not just tariffs that are affecting the economy
Other factors could also explain why companies are relying more heavily on labor cost savings and less on price adjustments than historical precedent would suggest:

  1. Changes in immigration policy have effectively halted U.S. labor supply growth. Over the past few years, foreign-born workers have made up the majority of the growth in the U.S. labor force. Out of necessity, companies could be finding ways to reduce their reliance on labor.
  2. Technology, including AI, is reshaping the global economy. Tech-related investment added an estimated 0.5-1 percentage points to U.S. growth in the first half of the year, according to our analysis of August BEA data. Early evidence also suggests that AI is starting to reshape the labor market. Younger workers, who are more likely to be displaced by AI, are having a more difficult time finding jobs. The unemployment rate of U.S. workers aged 16-24 is currently 10.5%, up from a pre-pandemic low of 6.6%, while the unemployment rate for all other workers is 3.4%, up from a 2.8% low.
  3. The offsetting tax cuts and credits from the One Big Beautiful Bill Act should begin to counter the drag from tariffs in the first quarter of 2026, by our estimates. But the interaction among taxes, tariffs, and AI investments means that not all companies will benefit equally. Companies that are more capital-intensive and have the budget to invest in AI are the relative winners, and they appear poised to take market share from labor-intensive businesses that are falling behind. While claims on unemployment insurance suggest that outright layoffs are still low, the environment is likely to challenge the business models of many companies.

What does all of this mean for Fed policy?
The Fed must navigate a complex set of policy shifts that affect both supply and demand and interact with technological transformations. While it's still early days, these factors appear to be weighing on real U.S. incomes through a larger labor adjustment than past tariff hikes would suggest. Looking a bit further out, whether higher productivity gains can offset lower labor supply from immigration policies and whether a broad investment pickup can offset more sluggish consumption are key issues for the U.S. economic outlook. However, over the next several months, with the Fed's policy rate still well above its estimates of neutral, plus the changing balance of employment and inflation risks, we see an argument for interest rate cuts as the Fed, companies, and investors gain a better understanding of how the economy is navigating all of these changes.

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.

CMR2025-0916-4828520