Short-term inflation expectations in the United States have risen, yet the stability of long-term expectations remains a crucial anchor. This signals that markets still have confidence in the Federal Reserve's long-term credibility. While imported goods account for only about 11% of U.S. GDP — limiting the direct impact of tariffs — it is essential to assess whether these tariffs could undermine productivity over time.

Between 2023 and 2025, the U.S. economy exhibited a growing divergence in productivity performance across sectors. In 2024, labor productivity in the nonfarm business sector increased, primarily driven by gains in Total Factor Productivity (TFP). However, 2025 saw a sharp decline in productivity, even as wages continued to rise. This mismatch triggered a spike in unit labor costs, signaling increasing inefficiencies and pressure on margins.

In contrast, the manufacturing sector maintained steady productivity growth, likely supported by greater operational efficiency and investments in automation and process optimization. As a result, manufacturing was better positioned to absorb cost pressures.

Looking ahead to 2027, projections indicate a widening gap. Nonfarm business productivity is expected to decline further, with unit labor costs rising above 9%, highlighting potential risks of stagflation. Meanwhile, manufacturing is projected to continue its upward trajectory, combining increased output with improved cost efficiency.

This growing disparity underscores the urgent need for broader economic sectors to prioritize innovation, process improvement, and strategic investment — critical measures to sustain competitiveness and protect profit margins in an increasingly complex economic landscape.

The much-touted “90 deals in 90 days” has failed to materialize. So far, the only concrete outcome has been a partial trade agreement with the United Kingdom — and little else. The United States has made no meaningful headway with key allies such as India, Japan, and South Korea. Fundamental disagreements persist with China and the European Union, further clouding the outlook.

Yet there is one silver lining: markets have become familiar with Trump’s characteristic pattern — bold rhetoric followed by retreat, a behavior now labeled as the “TACO” strategy (Talk A big game, then Climb dOwn). This predictable posture has continued to shape market sentiment in recent weeks, even amid escalating geopolitical tensions between Iran and Israel.

Meanwhile, tariffs are beginning to resemble oil shocks — both have the potential to trigger stagflation. Historically, oil shocks — such as those in 1973 and 1979 — led to simultaneous inflation spikes and economic slowdowns. Rising energy prices increased production costs, eroded consumer purchasing power, and disrupted global supply chains. This combination placed central banks in a policy trap: forced to raise interest rates to combat inflation, even as economic output declined.

Today, similar risks re-emerge. Recent geopolitical threats — including the vulnerability of key oil supply routes like the Strait of Hormuz — underscore the continued possibility of future energy shocks. If such disruptions occur amidst already fragile global economic conditions, they could reignite inflationary pressures while simultaneously suppressing demand. The result would mirror the painful stagflationary episodes of the past, complicating policy responses and extending economic distress.

We’re living in a strange moment for global logistics — one where policymakers must simultaneously plan for an almost unimaginable scenario (complete self-sufficiency in the U.S.) while also preparing for a potential return to pre-trade-war normalcy.

In the first quarter alone, the U.S. government collected only $500 million from the new Trump-era tariffs — a far cry from the $2 billion-per-day claim previously suggested. If the administration’s true goal is to generate $2 billion daily, the scope of tariffs would need to expand dramatically. Even with aggressive enforcement, the total annual revenue might only reach $100 billion — a fraction of what’s needed to create real leverage.

Despite the posturing, there is little indication that countries are currently motivated to enter serious negotiations with the U.S. In the coming months, tariffs may take a back seat as other topics dominate the agenda. Washington, for its part, appears uninterested in a global zero-tariff regime. Instead, tariffs are being used as bargaining chips — a strategy that suggests countries like Japan may have to settle for moderate tariff levels.

Notably, Trump has already succeeded in implementing a broad 10% tariff with relatively little international backlash — a significant political win, even before any concrete action on auto, steel, or aluminum tariffs (which remain sensitive issues for both the EU and Japan). The global community seems to have reluctantly accepted that 10% tariffs are “not that bad” — a perception shift that, regardless of opinion, marks a considerable achievement in itself.

Two potential economic scenarios emerge from this environment:

Scenario 1: High Tariffs (25% average or more)

• Inflation forecast: Peaks between 4% and 5%

• Growth forecast: Significant slowdown

• Unemployment: Could rise to around 5%

• Policy response: Sharp and early interest rate cuts to avert a recession

• Rate cut tone: Pessimistic — reacting to real economic damage

• Key condition: Inflation expectations must remain “anchored”
  
  

Scenario 2: Moderate Tariffs (around 10%)

• Inflation forecast: Peaks near 3%

• Growth forecast: Limited impact; consumption and hiring continue

• Policy response: Gradual rate cuts in the second half of the year

• Rate cut tone: Optimistic — assuming inflation remains under control

In either case, the tone and content of future trade agreements will be critical. If major deals involve eliminating or suspending key tariffs, markets could surge — especially in risk assets like equities and oil. However, if only symbolic or minor agreements emerge, any positive market reaction may prove short-lived.