The US-China tariff deal signifies a major de-escalation

Trade tensions between the US and China significantly de-escalated, and quicker than we anticipated, warranting changes to the baseline forecast in the second May baseline, to be released on May 21. Despite the temporary pause, it suggests less of a drag on the economy through the rest of this year.

What you will learn:

• The net effect is a reduction in our estimate of the overall US effective tariff rate from 18% to 15%. Supply-chain stress ahead of the back-to-school and holiday shopping season will be eased by the agreement.
• This pause pushes us toward our previous “best-case scenario,” which could see GDP grow at 1.9% on an annual average basis in 2025.
• A US recession hadn’t been our baseline, and the de-escalation reduces our subjective odds that were approaching 50% to 35%.
• The agreement is unlikely to change the calculus for the Federal Reserve, as it is comfortable waiting out tariff fluctuations to assess their effect on inflation and growth.
• Risks remain weighted to the downside because a complete trade agreement hasn’t been signed and tariffs are likely to be used as a negotiation tactic by the Trump administration as broader trade negotiations intensify. This will keep trade policy uncertainty uncomfortably high and create the potential for future, and significant, disruptions in supply chains.

Download the full report to learn more.