Economists braced for the worst when President Trump announced his tariff plan in April, yet the U.S. economy remained resilient. Inflation has defied the worst of expectations so far, but weakness in the July jobs report showed a weaker labor market and slower GDP growth in the first half of 2025 have raised red flags.
WSJ explains why the economy’s strength could be tested in the coming months.
Chapters: 0:00 Trump’s economy 0:36 Tariffs 1:37 Inflation 2:35 GDP 3:21 Jobs 4:22 What’s next?
News Explainers Some days the high-speed news cycle can bring more questions than answers. WSJ’s news explainers break down the day's biggest stories into bite-size pieces to help you make sense of the news.
00:41on virtually all U.S. trading partners on August 7th.
00:45Some major economies, like the European Union,
00:47Japan, and South Korea face a 15% tariff,
00:51while others, like Canada, Switzerland, Brazil, and India,
00:54face much higher rates, upwards of 35 to 50%.
00:58China is on a different track than most other nations.
01:01Its tariff rate is set to soar unless a deal is reached.
01:05For the world, what percent will that tariff be?
01:07I would say it'll be somewhere in the 15 to 20% range.
01:11We started the beginning of the year at a 3% average effective tariff rate.
01:15If you were taking the initial Liberation Day tariffs
01:19and you calculated out what that would mean,
01:21it could have been as high as 15%, which is 5X higher than where we were before.
01:27Right now, we have to see where we're going to land.
01:29We do expect above 10, right, above that 10% average.
01:33And so what this essentially means for us is that it could be inflationary.
01:37Trump's tariffs haven't fueled a massive spike in prices yet,
01:41although there's evidence they're starting to leave a mark.
01:44The consumer price index rose 2.7% in June when compared with the year earlier.
01:49The core measure, which excludes volatile prices like food and energy, rose 2.9%.
01:55That's a modest uptick compared to previous months,
01:57although still above the Federal Reserve's 2% target.
02:01This will not turn out to be inflation because we'll make sure that it's not.
02:05We will, through our tools, make sure that this does not move
02:08from being a one-time price increase to serious inflation.
02:12We have started to see the effects of inflation in the most likely of areas.
02:17The big ticket items, appliances, furniture, tools, children's items,
02:21all of those things have picked up in price.
02:22We saw a pretty rapid pickup in June relative to what we had been sort of seeing so far this year.
02:29And really, practically everything rose this month.
02:32Some components set really big records.
02:35Gross domestic product, or GDP, grew at a robust annual rate of 3% in the second quarter of 2025.
02:43That was up from a half percent contraction in the first quarter
02:46and driven by strong consumer spending.
02:49Our economics team, they have modeled out an expectation for 0.8% GDP growth for 2025 in the fourth quarter.
02:58So this is not a recession, but a slowdown.
03:01Combined with the first quarter's GDP figure, however, the economy grew 1.2% in the first half of the year,
03:07down from the 2.5% average pace in 2024.
03:11What you see is a rate of growth that is slower than what it was in 2024, but isn't disastrous.
03:17It doesn't suggest that a recession is happening or that one is imminent.
03:20The U.S. jobs market had been a source of strength until July.
03:25Job growth slowed to 73,000 that month, well below expectations.
03:30The Labor Department also sharply revised May and June's figures by a combined 258,000 jobs.
03:38Well, it really was a stunning downward division and it really sort of confirms something we had already been seeing in the soft data,
03:45and that is that the U.S. economy had been slowing and been slowing fairly dramatically.
03:49This is a problem for the Fed because it has a dual mandate of price stability and maximum employment.
03:55Keeping its benchmark interest rate too high could keep inflation subdued,
03:59but could also cause unnecessary damage to the job market.
04:03This is the special situation we're in, which is we have two-sided risk, risk to both of our goals.
04:08The labor market has been pretty clearly slowing over the course of this year.
04:12It hasn't been collapsing.
04:13I think the labor market generally for now looks like it is in balance.
04:17And so the question from a central bank perspective is how proactive do you want to be?
04:22The Trump administration has criticized the Fed for not lowering interest rates sooner while defending its trade policies.
04:29We have a great thing going.
04:31I think we're going to have the richest economy you've ever seen.
04:34But given the underlying weaknesses, the second half of 2025 could be even more unpredictable than the first.
04:41Beginning of the fall, we're going to have significantly more clarity and understanding of not just how the market should respond to these tariff rates,
04:52but also what does it actually mean for the past student's consumer.
04:55And it's likely to actually start showing up as business owners can start to make well-educated decisions about how much they actually have to increase prices.
05:05We look for growth this year to be between half a percent and one percent, which is below trend, slower than it has been for the past several years,
05:12but still consistent with a pretty soft landing in economic terms.
05:15You can go through the sorts of events that we've gone through and the sorts of policy changes that we have and still have growth that stays meaningfully above zero.
05:22I think that's a pretty good outcome.
05:23Our expectation right now is for no growth in the second half of the year, sort of moving sideways,
05:28not enough to necessarily declare a recession, but it is nonetheless not the best of economic situations for most Americans as they look at it.
05:37We're going to have to have a good look at it.
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