Proposed Tariff Hikes May Drive Inflation and Slow Economic Growth, According to New Economic Analysis
Morgan Stanley warns that Trump’s proposed tariffs could lead to a loss of up to 70,000 jobs each month, driving inflation and slowing U.S. economic growth.
In a recent analysis, Morgan Stanley economists raised concerns about the potential impact of proposed tariff hikes by Donald Trump, should he win the upcoming presidential election. The report suggests that these tariffs could significantly affect inflation, economic growth, and job creation in the United States.
The Economic Scenario
Morgan Stanley’s team, led by economist Seth Carpenter, modeled a scenario in which Trump implements a 10% blanket tariff on all global imports and a staggering 60% tariff on goods coming from China. The results are alarming. They estimate that these tariffs could raise the average tariff rates for about half of U.S. industries to between 25% and 35%.
This scenario could lead to an increase in the inflation rate, impacting consumers and businesses alike. “If the proposed tariffs are fully implemented, we estimate a near-term acceleration in the inflation rate, and a delayed drag in GDP growth,” Carpenter noted in their analysis.
Inflation and GDP Impact
The immediate consequence of these tariffs would likely be a surge in inflation. Morgan Stanley projects a 0.9 percentage point increase in the Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s preferred measure of inflation, over the next four quarters.
On the growth front, the impact could be equally severe. The tariffs would likely dampen both investment spending and consumer consumption. While lower imports might initially seem beneficial for the GDP, the overall growth is expected to decelerate by 1.4 percentage points over several quarters.
Job Creation at Risk
One of the most concerning aspects of the report is the projected decline in job creation. Morgan Stanley estimates that monthly payroll gains could drop by 50,000 to 70,000 jobs. This comes at a time when job growth has averaged 184,000 per month this year.
The bank’s economists emphasized that the true extent of these job losses would depend on various factors, including the scale and timing of the tariff hikes, possible retaliatory measures from trading partners, and the reaction of the currency market. However, they stated, “The direction of travel is clear.”
Political Responses
The Trump campaign has yet to respond to this report. Earlier this month, when questioned about forecasts indicating a potential slowdown in U.S. growth due to tariff hikes, campaign officials pointed to previous predictions that failed to foresee the economic upturn following Trump’s 2016 victory.
Broader Economic Implications
The potential economic fallout from increased tariffs is significant. Rising prices could strain consumers, particularly those in lower-income brackets who may struggle to absorb higher costs. Moreover, businesses could face increased production costs, leading to tougher decisions about hiring and investment.
Additionally, retaliatory tariffs from other countries could further exacerbate the situation, leading to a trade war that might have long-lasting implications for the U.S. economy. Historically, tariffs have been a contentious issue, often leading to a cycle of retaliation and counter-retaliation.
As the election approaches, the implications of Trump’s proposed tariff policies remain a topic of intense debate. Morgan Stanley’s analysis highlights the potential risks, including inflation, slowed economic growth, and job losses. Voters will need to consider these economic factors as they make their decisions in the upcoming election.
