The Tariffs Are Starting to Hit the Real Economy

Pain is coming in a few weeks, but effects are already here.

Dear readers,

Today’s GDP report showed the economy shrinking slightly in the first quarter, at an annualized pace of 0.3%. Not great news. But for reasons economist Jason Furman notes, this figure somewhat overstates how weak the economy was in the first quarter.

There was a tremendous surge in imports in the first quarter, which signals that firms were acting to get ahead of expected tariffs, which in turn led to a large buildup of inventories. The measure that Furman calls “core GDP” — just personal consumption, residential investment, and business fixed investment — grew at an annualized rate of 3.0%, similar to the rate seen in 2024.¹

But then, the first quarter ended before “Liberation Day.” The president’s intensifying — and then softening — of his tariff actions has caused financial market gyrations all this month. The first quarter GDP report showed us how people were preparing for that mess. The second and third quarter reports are where we should start seeing the economic damage. Freight volumes are already falling, since some tariffs have already gone into place. Within a few weeks, that should be manifesting on store shelves as a combination of shortages and higher prices. Some businesses will close operations (or fail to open new ones) that no longer pencil because of the tariffs. And then there will be knock-on effects from that — less job creation means less consumer spending, which further discourages business investment and job creation, and so forth.

Image of inventory buildup generated by ChatGPT

Since this is all about to smack the American consumer across the face, I’ve been a little nonplussed by questions like “Are Democrats talking too much about Kilmar Abrego Garcia?” and “Should Amazon be breaking out tariff costs over Donald Trump’s objections?”

The president has already lost six points of net approval in the last month, according to the Silver Bulletin poll tracker, and that’s purely on headlines and financial market effects. Based on the last few years, the last thing I am worried about is that voters will fail to notice or care about a combination of inflation and product shortages. Today, the president declared in a cabinet meeting that it doesn’t matter if toys become more expensive because American children have way more toys than they need already.² Even the Democratic Party won’t be able to find a way to screw up the messaging when the Republican president is choosing to position himself as the Grinch.

That said, I do have one piece of political advice for Democrats.

The Senate has been voting on resolutions to disapprove Trump’s tariffs, forcing Republican senators to defend them on the record. But the House hasn’t been voting on similar resolutions because House Speaker Mike Johnson has pushed through changes to House rules that strip members of their usual ability to bring up privileged resolutions to block the tariffs. Democrats should move to bring up tariff-disapproval resolutions anyway. The presiding officer will, of course, rule any such motion out of order, in accordance with House rules. Then a Democrat should move to overrule the chair; it is possible to force a vote on overruling the chair’s decision not to bring the tariff resolution to the floor, even if you can’t force a vote on the tariffs themselves.

I expect Republicans to vote down that motion, too. But then Democrats will have gotten every House Republican on the record, voting to preserve Trump’s inflationary and economically destructive tariff policy. And they can use that in attack ads next year. Go ahead and let Republicans explain that “I wasn’t voting on the tariffs, I was voting on a matter of the House rules.” When you’re explaining why you didn’t vote to protect American consumers from higher prices, you’re losing.

Very seriously,

Josh

P.S. In case you missed it, I had an interesting conversation last week for The New York Times with Lael Brainard and Conor Sen, looking at why the tariffs are tying the bond markets in knots.

1. As with core CPI, the point of looking at core GDP isn’t that only some contributors to GDP “count.” It’s that the set of contributors included in the “core” measure move more stably, and so they serve as a better predictor of future changes in the overall measure.

2. I guess, having won over Naomi Wolf with his embrace of woo-woo anti-vaccine ideas, he now thinks a dose of anti-consumerism will get him Naomi Klein?