As trade talks with China resulted in a reduction in tariff rates, Nationwide Chief Economist Kathy Bostjancic said in a statement that her initial forecast shows that "we could see 0.5–1.0% higher growth than our prior forecast of no gain in real GDP growth Q4/Q4 this year. Economic growth still slows since tariff rates will be higher than before President Trump took office. There already has been some dampening effects on activity, and DOGE-related efforts to reduce the size of the government will also weigh on employment and activity later this year.”
She offers the following analysis:
The U.S. and China slashed the embargo-like tariff rates more than expected helping to avert a recession. The agreement covers a period of 90 days, but if trade talks continue to be productive the lower tariff rates will remain in place. The U.S. will lower the increased tariff rate levied against Chinese goods from 145% to 30%, as the so-called reciprocal rate falls from 125% to 10%, while the 20% tariff increase related to the fentanyl crisis will remain – though Treasury Secretary Bessent offered that the latter could be reduced if China takes action on flows of fentanyl into the U.S. China will reduce the size of increased tariffs from 125% to 10% and it will remove from its export control list seven critical rare earth minerals.
Future talks will discuss China purchasing more U.S. goods to narrow the bilateral trade gap. The agreement does not include sector-specific tariffs levied across all countries on autos, aluminum and steel.
Also on the trade front, the U.S. and the U.K. announced a trade agreement last week, which lowered rates for many products down to the 10% minimum tariff rate. While this trade deal may be easier to achieve than others, momentum is building towards more deal announcements in the coming weeks
She predicts that Inflation will likely rise to a lesser degree, peaking at around 3.4% year-over-year in Q4 this year instead of our prior forecast of 4% year-over-year.
Regarding rate cuts, she believes that the Federal Open Market Committee (FOMC) will wait until September to cut rates again. "By that time, we should have clearer evidence of a weakening labor market rather than just a drop in the 'soft' survey data. We expect them to go with a larger 50-bps rate cut, followed by another cut of 25 bps in October to shore up the economy. "
