Shortly after returning to the White House in January, President Donald Trump reignited his protectionist trade agenda, imposing a new wave of tariffs despite warnings from economists and industry leaders about potential economic fallout.
He began by targeting long-standing partners like Mexico, Canada, and China, before expanding his focus to key sectors such as steel, aluminium, and automobiles. On what he branded “Liberation Day” in April, Trump launched a sweeping package of tariffs on goods from countries around the globe.
The move rattled global trade and financial markets, prompting an immediate backlash. However, Trump quickly hit pause on the most aggressive measures, offering a 90-day window for negotiations, a deadline that expires on 9 July.
With that date looming, Trump faces a critical decision that could define the trajectory of the US economy.
Stock Market Rebounds, But Fragility Remains
The announcement of tariffs triggered a steep sell-off in US equities. The S&P 500, which tracks the performance of 500 top US firms, fell by about 12% in the week following “Liberation Day,” as investor sentiment soured.
At the peak of the crisis in early April, the index dropped to 4,983, down from a February high of 6,144. But markets rebounded swiftly after Trump eased his tariff stance, settling on a more modest 10% rate instead of the harsher levies originally proposed.
As of 3 July, the S&P 500 had climbed back to 6,275 , up about 6% for the year. Shares in the UK and Europe have also regained ground. However, companies in tariff-sensitive industries, such as retail and automotive, remain under pressure.
Despite the recovery, some analysts warn of complacency. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, noted that markets may be underestimating the risk of Trump reverting to harsher tariffs if talks falter.
Trade in Flux
The tariff threat initially sparked a surge in US imports as businesses rushed to beat the new duties. But trade volumes fell sharply in April and May.
Still, overall imports in the first five months of 2025 rose 17% compared to the same period last year, reflecting strong early-year momentum.
What happens next depends heavily on Trump’s next move. If the tariff pause is lifted and steep duties return, a short-term recession becomes more likely, according to Ben Hackett of Hackett Associates, which monitors shipping trends for the National Retail Federation.
“For now, we’re in a holding pattern,” Hackett said. “But if the freeze ends, the consequences could be swift and severe.”
Price Effects Still Emerging
Imported goods make up only about 11% of US consumer spending, and inflation has remained relatively contained — at least on the surface. From April to May, consumer prices rose just 0.1%.
Trump and his allies cite this data to argue that fears of runaway inflation are exaggerated, even though average tariffs are now six times higher than at the start of the year.
Yet certain items, such as toys, have seen steeper price hikes, and many goods subject to the new duties have not yet hit store shelves. Companies may delay price increases or pass them on gradually, especially those with healthy margins.
Still, most economists believe consumers will ultimately absorb the cost. “If you’re not digging deeper into the data, you might think inflation isn’t a concern,” said Sonders. “But it’s far too early to declare victory.”
Consumer Spending Slows
Consumer sentiment began dipping as Trump unveiled his trade plans, although political leanings often colour perceptions of the economy.
Now, actual spending patterns are showing cracks. Retail sales fell by 0.9% from April to May, the second consecutive monthly drop and the first back-to-back decline since late 2023.
Overall consumer spending grew at its slowest pace since 2020 in the first quarter and declined unexpectedly in May.
While a recession is not the consensus outlook, slower growth is widely anticipated. Much hinges on the strength of the labour market. Unemployment remains low at 4.2%, and job growth in June was consistent with the 12-month average. But businesses appear cautious.
“We’re in a kind of stall, a wait-and-see mode driven by high uncertainty and volatile policy,” said Sonders. “Many firms are hitting pause on hiring and investment.”
Outlook: Cautious Optimism or Deeper Slide?
As the July 9 deadline approaches, the economic path ahead remains uncertain. Trump’s next steps whether he extends the pause or reinstates harsh tariffs will likely determine whether the economy merely softens or slides into deeper trouble.
“It’s hard to see a scenario where growth accelerates from here,” Sonders warned. “The real question is whether we’re in for a mild slowdown or something more serious.”
