Economic Monitor – Weekly Commentary
by Eugenio Alemán

If it ain’t broke don’t fix it

April 4, 2025

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The international trading system is not perfect, but as we have said so many times, freer trade is better than no trade and tariffs are, typically, the worst solution to trade issues between countries. Yes, reciprocal tariffs are fair game, that is, if you impose a tariff on us, we impose a tariff on you. But this is not what happened on April 2. On April 2, the Trump administration implemented a formula to calculate what they call ‘reciprocal’ tariffs but are NOT reciprocal tariffs. The formula is the following: if the U.S. has a, let’s say, $10 billion deficit in goods with another country, Country A, while importing $20 billion from that country, then $10/$20 = 50%. Thus, the Trump administration halves that percentage to 25% and imposes that percentage as the new tariff level for this country. That new tariff is added on top of any other tariffs imposed before against that country and/or any other sectoral tariffs applied to, like automobiles, automobile parts, steel, aluminum, etc.

Just as an example. According to the U.S. International Trade Administration webpage, Japanese tariffs for all products imported into Japan are about 4.3%, but the Trump administration has applied a tariff of 24% on Japanese imports. The European Union got hit with a 20% tariff but according to the World Trade Organization, the average tariffs to import into the EU is 5%.

If our calculations are correct, today’s effective tariffs of 3.8% will probably increase by more than 20 percentage points, the highest tariff rate since the early 1900s. Of course, since we typically try to see the glass half full rather than half empty, we still expect that calmer minds will prevail, but this is not a guarantee. If these tariff rates hold, we estimate that it will cost an American family about $5,600 per year more than what it is paying today for everyday goods. Of course, this assumes that American families don’t substitute away from buying some of these products. But the fact that the administration has imposed a tariff of 10% on all the countries of the world means that some of these costs will be unavoidable. That is, a typical American family would have to pay, at least, about $2,500 more per year for the goods it buys. Hopefully, this knowledge will give an opportunity to negotiate lower tariffs.

The biggest problem today is that this calculation does not include a new round of retaliatory tariffs, which could bring this calculation much higher before it goes lower again. Today, the Chinese government said that they would match the 34% tariff imposed on Chinese imports with a 34% tariff on exports from the U.S. to China. Furthermore, China is banning 11 U.S. companies from doing business in China.

It is very difficult to envision a US economy that does not react negatively to what has been happening. First were consumers, who have indicated, in every opportunity they have had, that they are not happy with what is happening. Now, our guess is that the recent increase in uncertainty, plus Wednesday’s decision on tariffs, will amplify businesses’ concerns regarding the future of the U.S. economy.

For these reasons we have made further downward adjustments to economic growth, as well as upward adjustments to inflation and the rate of unemployment for this year. Although we still are not projecting a recession, the probability of a recession has continued to increase. At the same time, we increased the number of rate cuts during this year from two to three 25 basis points cuts. Please see the forecast table below.

The case for stagflation, revisited

For those of you who follow this publication regularly you know how adamant we have been in rejecting any notion of ‘stagflation’ since the recovery from the Pandemic recession. One of the reasons why the word stagflation is used so often is because it is catchy, for one, and two, it reminds many old timers (i.e., one of us) of the difficult environment lived during the 70s and early 1980s. In fact, just two weeks ago (see Weekly Economics for March 21, 2025) we vehemently argued that the U.S. economy was not about to enter stagflationary environment. We are still in that camp today, but after Wednesday’s tariff decisions, we cannot be so sure any longer.

Our argument two weeks ago was that the U.S. economy would have to slow down to a rate of growth of about 1.0% of GDP or below for several years while inflation would have to increase past 5% and the rate of unemployment would have to increase past 5% to 6%.

This week’s actions by the Trump administration are probably going to test our certainty even though we still believe that the Federal Reserve’s monetary policy tool kit today is better prepared to deal with current inflation and growth risks.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

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