Image Source: Pixabay

Sorry folks, I usually try to post earlier in the day. But like the rest of the country, I was following Donald Trump’s efforts to use his Justice Department to convince the public that he didn’t really know America’s most famous pedophile, Jeffrey Epstein.  

Getting back quickly to economics, it is striking how no one can tell Donald Trump that the tariffs he keeps “hitting” other countries with are taxes on us. This one really should not be hard; we pay the taxes when the stuff comes in at customs, not China, Japan, or whatever trading partner/enemy Trump thinks he is nailing. 

We have the data. The exporters are not lowering their prices. This means someone here — importers, retailers, or consumers — will be paying the tax. We will need a few more months of data to get a better sense of the breakdown, but we already have enough to know it is us and not them.

In terms of the economic impact there is not some magic to import taxes. These will mean higher inflation and lower purchasing power. Based on the June data, we were looking at a $240 billion increase in annual taxes, or $2.4 trillion over the course of a decade. That comes to $1,900 per household over the course of a year, or $19,000 over the next decade.

When Trump is done with his “deals” we are likely looking at taxes twice this high — possibly as much as $500 billion a year or $5 trillion over the next decade. That is $4,000 per household per year or $40,000 over a decade. 

If you don’t think a tax increase of this size will be a serious hit to the economy, you better go back and do a little homework. Trump’s top advisors all know these tariffs are very bad news but can’t say anything or he will fire them. I guess they think in Donald Trump’s economy they won’t be able to get another job. 

On other matters, we have two huge economic reports coming out next week. On Wednesday the Commerce Department releases the second quarter GDP report. The most important point to keep in mind when looking at this report is that it has to be considered in conjunction with the first quarter report.

People may recall that GDP shrank in the first quarter at a 0.5 percent annual rate. Many analysts, including me, downplayed the drop, noting the unusual factor driving this decline — specifically, there was a huge surge of imports in advance of the Trump tariffs that subtracted 3.7 percentage points from growth in the quarter.

The second quarter will see this in reverse. We will see a sharp fall in the trade deficit, which will be a huge contributor to growth in the quarter. If we want to be serious, we have to average the two quarters together. If the second quarter comes in as expected, roughly 2.5 percent growth, that gives us an average of 1.0 percent over the first half of the year. That is a sharp slowing from the 2.8 percent growth of 2024.  

The other big release is the July jobs report. Look to much slower job growth. The June number, 147,000, was distorted by an increase of 63,500 jobs in state and local government and education. This was an erratic seasonal adjustment, not a sudden burst of hiring. It will be at least partially reversed in the July data.

However, slow job growth is not a big concern. The sharp crackdown on immigration, which began last June under Biden, virtually guarantees slower job growth.

The bigger concern is what is happening to the unemployment rate and wage growth. While the unemployment rate dipped to a historically low 4.1 percent in June, the employment-to-population ratio is 0.3 percentage points below the April level. There have already been notable rises in the unemployment rate for vulnerable groups like Black workers and young people. Their situation may deteriorate further in July.

The other big issue is wage growth. After increasing at a 4.0 percent annual rate in 2023 and 2024, the average hourly wage increased at just a 3.2 percent annual rate, comparing the last three months (April-June) with the prior three months (January-March). 

It is important to keep an eye on this number. If we see slower nominal wage growth, coupled with rising tariff-induced inflation, it will mean slower real wage growth. That will translate into slower consumption growth and slower economic growth.

So, there is a lot to pay attention to with the economy, if we can take our eyes off the Trump-Epstein craziness for a few minutes.

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