The Impact of Trump's Tariff Proposals on the U.S. Economy: Morgan Stanley Analysis
In a recent note, Morgan Stanley warned that former President Donald Trump's proposed tariffs could lead to slower economic growth and higher inflation in the near-term for the United States. The bank highlighted the potential downside risks to U.S. growth and a possible increase in inflation, especially if Republicans win the 2024 election.
The proposed tariffs could take the form of broad 10% tariffs on all imports or more targeted, country-specific tariffs, with a focus on China. According to Morgan Stanley analysts, the rapid implementation of such tariffs could significantly raise costs for U.S. industries, as more than half of imported goods are capital and intermediate goods.
Currently, 60% of Chinese imports are subject to tariffs, but under the new proposals, this figure could rise to 100%, with the average tariff on Chinese goods potentially increasing from 17% to 77%. Tariffs on imports from other countries could also climb to 25-35%.
Morgan Stanley predicts that these tariff hikes could lead to a 3% decrease in U.S. consumption, a 3.1% drop in business investment, and a 1.4 percentage point slowdown in real GDP growth. Additionally, monthly job gains could see a decline of 50,000-70,000.
In terms of inflation, the bank expects headline PCE inflation to potentially rise by 0.9 percentage points over four quarters under the proposed tariffs. This inflationary pressure could complicate the Federal Reserve's policy response, delaying possible rate cuts. However, as growth falters, Morgan Stanley anticipates that the Fed would eventually resume easing measures.
The full impact of the tariffs will depend on how they are implemented, potential retaliation from other countries, and currency adjustments. It is crucial for investors and individuals to monitor these developments closely and understand how they could affect their finances and overall economic well-being. By staying informed and prepared, individuals can make more informed decisions to navigate the potential challenges and opportunities that may arise from these tariff proposals.
