Equities in the major indices of U.S. stock markets are trading at or near all-time highs.
The economy is growing. The Federal Reserve Bank of Atlanta just raised its projection for GDP growth in the third quarter to 3.3%. There are signs of a sustainable boom in productivity growth. Corporate earnings are growing strongly, and analysts are raising earnings forecasts at a time when they are typically tempering expectations. To cap it all off, the Federal Open Market Committee of the Fed Board just lowered interest rates and indicated that further rate cuts are on the way.
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Everyone should be happy, right?
Except that they’re not. Consumer confidence is low, and many companies are announcing that the tariff regime instituted by President Donald Trump is causing them significant financial harm. Trump’s tariffs are the canary in the coal mine of the U.S. economy.
There is no question that Trump’s tariffs are a tax. At the moment, U.S. corporations are bearing the burden of the tariffs. In effect, they are a corporate tax in disguise. That’s a problem because corporate taxes are among the most damaging taxes from the standpoint of the economy. When corporate taxes are higher, businesses have less cash flow to invest in hiring workers or productivity-enhancing projects. So, productivity growth may be strong today, but over time, the tariffs will have a negative effect on long-run productivity. When productivity growth inevitably slows because of the tariffs, the potential growth rate of the economy will be lower.
GDP growth is a function of productivity growth and increases in the supply of labor. Because of demographics, an aging population, and Trump’s immigration policies, the available pool of labor in the U.S. economy is dramatically lower than it was a few years ago. The negative effects of Trump’s tariffs on productivity growth are especially troubling because of the fiscal crisis that the country faces with the large federal deficit.
The Trump administration is counting on strong economic growth, 4% annual growth, and the tariffs to stabilize and reduce the federal deficit. But a 4% economic growth rate is simply not plausible given the backdrop of an almost certain slowing in productivity growth and almost no growth in the supply of labor.
Recent announcements from two of the country’s finest companies illustrate why Trump’s tariffs will have such a negative effect on productivity growth and overall economic growth in the long run.
John Deere is a leader in manufacturing. Its agricultural machinery is operating throughout the United States and around the world. But because of Trump’s tariffs on steel and aluminum, Deere’s manufacturing costs are increasing by $600 million this year. Moreover, because China is retaliating against the U.S. for its tariffs, Beijing is imposing tariffs on U.S. soybeans. U.S. exports of soybeans are down 51%. And of course, soybean farmers now purchase less equipment from Deere.
Caterpillar Inc. is the world leader in manufacturing heavy equipment. Caterpillar enjoys considerable success exporting heavy equipment from the U.S. to overseas markets. Logically, Trump should be trying to facilitate Caterpillar’s operations, but his tariffs have the exact opposite effect. About two weeks ago, the company said that Trump’s tariffs would reduce its operating income by $1.5 billion in 2025. Trump’s tariffs make Caterpillar a less productive company, and they almost certainly will reduce its overseas sales because of retaliatory tariffs.
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It is no surprise that the U.S. manufacturing sector has been experiencing little to no growth since Trump announced his reciprocal tariffs in early April.
The financial hit to the operations of Deere, Caterpillar, and other large manufacturing companies in the U.S. from Trump’s tariffs makes the goal of a manufacturing renaissance a mirage. Trump’s tariffs are economic quicksand.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X @JamesY54939 and reached at [email protected].