Executive summary

The long-anticipated “reciprocal” tariff plan turned out to be much more impactful than businesses had expected and significant uncertainty remains as we enter a 90-day negotiating period with many of our trade partners. Regardless of how those negotiations evolve, the increasingly unpredictable nature of U.S. trade policy will have long-term implications for our trade relationships. Given the anxiety concerning tariffs and other news coming out of Washington, D.C., consumer and business sentiment has turned sharply negative during the past two months. But we will need to wait for the “hard” data to see if that translates into a weakening economy.

Grain, oilseed and cotton prices have decreased by about 50 percent since 2022, but input costs have not seen a parallel decrease. Uncertainty around the seemingly endless tariff drama, a less-favorable federal biofuels-policy environment, and an expected record-large South American harvest provide a downbeat outlook. Given reduced feed costs and strong consumer demand, meat, livestock and dairy markets have been enjoying generally good profitability. But tariff uncertainty will continue to weigh on markets for the foreseeable future.

Amid surging demand for electricity across the nation, a tariff-induced spike in the cost of transformers will further accelerate the costs of delivery. The new administration is taking a “technology agnostic” view, which may speed the broadband buildout in underserved regions but won’t provide the advantages of a “fiber-first” approach.

By Rob Fox

Uncertainty concerning tariff policy has dominated boardroom discussions in recent months as President Donald Trump continues to make good on his earlier assertion that “tariff” is his favorite word in the dictionary.

The situation changes almost daily, but as of late April the basic tariff framework included several items.

• “Reciprocal” tariffs were put in place April 2, which include across-the-board 10 percent tariffs on all products from all countries.

• Additional tariffs placed on many other countries were suspended April 9 for a 90-day period, giving time for those to be negotiated. But the tariff rate for China was raised to 125 percent and was in effect as of April 9.

• There was a 25 percent tariff on goods from Canada and Mexico that are not specifically covered by the United States-Mexico-Canada Agreement – products covered under the agreement remain tariff-free.

• Section 232 sees 25 percent global tariffs on steel, aluminum, automobiles and most auto parts.

• Further Section 232 tariffs on copper, lumber, pharmaceuticals and semiconductors are pending – those items are currently not included in the reciprocal tariff action.

Most of the focus thus far has been on likely near-term effects. What will the tariffs mean for 2025 inflation, gross domestic product and job growth? The overwhelming majority of economists and market analysts opine that the effects will be negative on both counts. But the severity of the effect is being debated; the betting odds of a recession in 2025 are now the same as a coin flip.

Until the past few weeks, most viewed the administration’s tariff campaign as a short-term negotiating tactic to decrease tariffs in our export markets. But it’s now shifting toward the view that some level of tariff protectionism is here to stay in order to promote domestic manufacturing. But regardless of whether the tariffs come or go, whether or not we have a recession or stagflation, the effects of fickle trade policy will have very-long-term consequences – particularly the international loss of trust in U.S. policymaking.

Economists often liken trade wars to the “prisoner’s dilemma” game that every student of the dismal science is challenged to play at some point in their education. It’s a simple make-believe game where two people must independently choose to either confess or deny their participation in a hypothetical crime. If both confess, both receive a short sentence. If both deny, they both receive a longer sentence. And if one denies and one confesses, the denier goes free while the confessor faces a very lengthy sentence.

Most students want to win big and there is the temptation to “deny” hoping that the opponent “confesses.” Sometimes that strategy works. But then the professor tells the students to play it again. The “winners” who went free the first time are now in a pickle. Trust has been lost and the likely outcome for them is a series of long prison terms. The only way out is to take a repeated series of defeats, or servings of humble pie, to earn back the lost trust.

Trust is needed in any long-term relationship, and relationships between countries last a very long time – human lifetimes. Being trustworthy is not a sign of weakness or even kindness; being trustworthy is a big advantage in the business world. A great example of strength via trustworthiness is Walmart’s grocery business. Although it has a well-earned reputation as a tough negotiator in supply contracts, once a deal is struck its commitment is as good as gold. Walmart and its suppliers work to grow sales together and often have relationships that last decades – relationships that work to the benefit of both parties.

Food companies can trust that they will be treated fairly, and that reputation helps Walmart secure long-term lesser-price supply contracts. On the other hand there are other grocery retailers that focus on short-term transactional relationships; they will quit a supplier to save a penny per unit. But food companies know that and act accordingly; they don’t invest resources in that relationship. But they will build a new plant for Walmart.

It now appears that the administration’s primary objective of tariffs is to bring manufacturing capabilities back within U.S. borders. Although the United States is already the least-reliant on imports of any major economy in the world, few would argue against the goal of increasing our capabilities in some industries for national-security reasons. But unpredictable tariff policy isn’t the way to achieve that. Businesses are unlikely to invest millions or billions based on expectations of a policy that could change at any time for any reason. They can’t afford to take that risk. In business, trust is built through clear and honest communication, consistent delivery on promises, and the quick acknowledgement and correction of mistakes. As Warren Buffet said, “It takes 20 years to build a reputation and five minutes to ruin it.”

Rapidly worsening expectations about the economy are generating concern amongst businesses and investors. Only three times since 1980 has the University of Michigan Consumer Sentiment Index decreased as quickly during a three-month period as it did from December 2024 to March 2025 – a decrease of 17 points to 57, versus the long-term average of 85. In the same survey, long-term inflation expectations rose to their greatest level since 1995. Another monthly survey done by The Conference Board showed that forward-looking expectations for income, business and labor-market conditions decreased to their worst levels in 12 years. The Philadelphia Fed’s March Manufacturing Business Outlook posted the biggest two-month decrease in new-order expectations in its 58-year history.

Those and many other surveys of consumers and executives regarding opinions, feelings and expectations are referred to as “soft data,” whereas official government and other economic reports of actual events are considered “hard data.” Hard data includes things like weekly payrolls, consumer expenditures, unemployment claims, etc. At the moment there is a huge discrepancy between the historically-awful soft data and the hard data, which remains fairly strong.

Look at a few high-level metrics of economic health.

• Unemployment is at 4.1 percent.

• The economy added 151,000 new jobs in February.

• Inflation-adjusted incomes showed strong gains in January and February.

• The fourth-quarter-2024 gross domestic product was revised, increasing by 2.4 percent.

• Even Consumer Price Index inflation is running a reasonable 2.8 percent versus a year ago.

The million-dollar question is whether the dismal results of most surveys of opinion and sentiment will soon translate into real changes in economic outcomes. While their crystal balls are notoriously glitchy, economists are good at looking for parallel events in history and sorting out the data. Not including the short pandemic-related recession, which was overwhelmed by massive government stimulus, the prior three recessions in 1990, 2000 and 2007 were all forewarned by weakening sentiment that led to a steep decline in consumer spending – which comprises almost 70 percent of the economy. The accompanying exhibit shows the average relationship between consumer sentiment and month-on-month consumer-spending growth. Using the eyeball metric, it appears that the decrease in spending occurred three to five months after sentiment showed signs of weakening.

Also note that consumer spending in January and February has decreased off its strong post-pandemic trend, but not yet alarmingly so. Market watchers noted that this January was the coldest month since 1988, which led to a slowdown in auto sales, home improvement and other outlays. But there were no such excuses for the weak February numbers. Given the rapid decrease in sentiment polls, we'll look at the recent hard-data reports – retail sales April 16 followed by total consumer spending April 30. That should provide some guidance as to which way the economy is heading.

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