The U.S. economy has demonstrated a 2.5 percent rise in real Gross Domestic Product from the first to the second quarter, driven largely by fluctuations in inventory levels and net exports. However, underlying indicators suggest that momentum may be weakening. According to the Research Seminar in Quantitative Economics (RSQE) at the University of Michigan, the broader economic engine is showing signs of strain. n nBusinesses appear to have accelerated purchases ahead of anticipated import taxes, temporarily inflating activity. Once these tariffs are implemented, this artificial boost is expected to fade. While several trading partners, including Canada and Mexico, are projected to settle on tariff rates near 15 percent, the situation with China diverges significantly. Economists estimate that tariffs on Chinese imports could reach approximately 50 percent—about 40 percent higher than current levels. Given that China ranks as the third-largest trade partner and supplies a wide range of consumer goods sold in major retail chains, this shift could have broad implications. n nThe impact on inflation remains uncertain, but rising import costs may influence the Federal Reserve’s future decisions on interest rates. The July employment report added to concerns, showing a decline in the three-month average of payroll gains. In response, the White House dismissed the head of the U.S. Bureau of Labor Statistics, raising questions about the credibility of future labor data. n nMichigan’s economy has performed relatively well in 2025, though growth is expected to slow in the coming months. Projections suggest modest expansion in 2026 and 2027, potentially creating nearly 19,000 jobs. These gains are likely to be concentrated in private education and health services, leisure and hospitality, and government sectors, while employment in business-related fields remains largely unchanged. Forecasters emphasize the high degree of uncertainty, particularly regarding trade policy. n nNegotiations with various nations, including those led by former President Donald Trump, have yielded some progress, but higher tariffs on Chinese goods—such as electronics, apparel, furniture, and appliances—are expected to push prices upward. Retailers have absorbed some of these costs so far, but this strategy is not sustainable long-term. Additionally, tariffs on steel, aluminum, and the automotive sector could lead to notable job losses. n nInflation in the region is expected to ease to 2.1 percent this year, but could rebound to between 3 percent and 3.5 percent in 2026 and 2027 due to sustained price pressures from trade measures. Meanwhile, personal income growth slowed from 5.1 percent in 2023 to 3.9 percent in 2024. Despite higher nominal wages, real disposable income has increased at a much weaker pace, limiting consumers’ actual spending capacity. n— news from Michigan Public
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Report: Economic growth engine sputtering
The U.S. economy has signs of strength, but that’s been caused by seesaw movements of inventories and net exports pushing the real Gross Domestic Product growth pace up 2.5% from the first quarter to the second quarter. n nBut as the Research Seminar in Quantitative Economics (RSQE) at the University of Michigan put it in its recently released report: n n“Under the hood, however, the economic growth engine is sputtering.” n nIt seems companies, in anticipation of tariffs, have been buying goods before the taxes on imports go into effect. That ends when tariffs do take effect. n nThe forecast notes that while several trading partners have agreed to tariff rates of around 15%, with Canada and Mexico to also end up at or close to that rate, China is a different story. n nThe economists think the eventual level of tariffs on China’s goods will be about 50%. That’s about 40% higher than now. China is the country’s third largest trading partner, and a lot of what Americans buy at big retail outlets comes from China. n nWhat that means for inflation, and ultimately what it means to the Federal Reserve in its decisions on interest rates, is not at all certain. n nThe July jobs report brought an unexpected chill to the peak of summer. As seen in the chart below, payroll job gains for the month and revised numbers for previous months pulled the three-month average down. A White House response to that data was to fire the head of the U.S. Bureau of Labor Statistics. n nWhat that will mean to the future reliability of the BLS reports is yet to be seen. n nIn an earlier report, the economists reported that Michigan’s economy has been fairly strong this year, but that trend is expected to slow for the rest of this year. The good news is that economists at the University of Michigan forecast some moderate growth in 2026 and ’27. n nMore modest growth over the next two years could amount to close to 19,000 jobs added. However, that growth is expected to be primarily in private education and health services, leisure and hospitality and in the government sector. Jobs affected in businesses will be mostly flat. The economists note that there’s a lot of uncertainty in their estimates. n nOne of those uncertainties in the both the U.S. and Michigan economic futures is how tariffs will play out. Some countries are negotiating with President Donald Trump and reportedly making progress. However, there likely will be some effect on prices for some goods. n nNegotiations with China are expected to result in much higher tariffs. That will mean electronics, appliances, clothes, furniture and other goods that are commonly sold in big box stores will be significantly higher. Most of the outlets have already eaten some of the additional costs of tariffs. That cannot continue forever. n nThe auto sector tariffs along with those on steel and aluminum could mean some significant job losses. n nThe economists forecast the regional inflation rate to moderate to 2.1% this year, but inflation picks back up in 2026 and ’27 as tariffs put upward pressure on prices. Local inflation could hover around 3% to 3.5%. n nPersonal income grew at 5.1% in 2023 and then dropped to 3.9% growth in 2024. n nAlthough people are bringing home bigger paychecks, the real disposable income has been increasing at a much slower rate. That means less increase in spending power.