How the U.S. Economy Has Defied Doomsday Predictions on Tariffs

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When President Trump announced sweeping tariffs in April, economists predicted surging inflation and raised the odds of a recession. Companies and consumers stockpiled to get ahead of price rises. Those worries now seem overblown.

Inflation, while too high, is lower than forecasts. And the economy continues to grow despite the steepest tariffs in almost a century.

“I’m not sure they’ve mattered as much as people thought they would,” said Kelly Kowalski, head of investment strategies at MassMutual.

At the same time, the promised benefits of tariffs also largely haven’t come to pass: Revenues from Trump’s levies have been far lower than the Treasury Department predicted, and there are few signs of a domestic manufacturing boom.

Annual inflation was 3% in September, above the Federal Reserve’s 2% target. Tariffs have played a role, but a muted one, pushing up prices for goods such as furniture and apparel.

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The U.S. Treasury is on track to collect $34 billion in October, according to a Pantheon Macroeconomics analysis of customs data. If that pace continues, the U.S. would be on track for $400 billion over a full year, short of Treasury Secretary Scott Bessent’s August prediction that tariffs could bring in between $500 billion and $1 trillion a year.

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Loopholes and exemptions mean many goods avoid higher levies. At the same time, companies have moved production from countries facing high tariffs—especially China—to countries such as Vietnam, Mexico and Turkey that face lower levies for many goods. That pushes down effective rates.

“They’re saying: I’m not avoiding offshore, but I’m diversifying,” said Randy Altschuler, chief executive of Xometry, an online marketplace that connects manufacturers with suppliers around the globe.

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Even where U.S. companies have to pay full tariffs, they are passing only some of these costs on to consumers. Bank of America estimates that consumers are paying 50%-70% of tariff costs so far, with companies covering the rest. A key reason: Corporate profit margins are much higher today than before the pandemic, making it easier for companies to pay tariffs without raising prices.

Retailers are in a position to afford to pay 30% of the tariff costs and still keep their profit margins at roughly the level they averaged during the 2010s, Pantheon estimates.

Take the car industry. Average auto prices in September were only about 1.1% higher than in March, after adjusting for seasonality, according to JPMorgan, even though car imports from many countries faced tariffs of 15% or more.

That number implies carmakers are paying about 80% of the tariff costs and only passing 20% on to customers, JPMorgan estimates. Car prices are up significantly since 2020, and manufacturers worry that consumers simply can’t afford to pay more. The same postpandemic inflation that boosted prices also padded profit margins, making it easier for carmakers to absorb tariffs today.

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Aside from inflation, economists worried tariffs would drag down consumer spending, which accounts for almost 70% of gross domestic product. In April, consumer confidence fell to the lowest level since 2022. In the past, drops in confidence have often led to a decline in spending. This year, Americans boosted by a record-high stock market and low unemployment have kept shopping.

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