Tariff hikes could cause GDP to fall, economist says

Former president Donald Trump, the Republican nominee for president, has made tariffs on imports part of his campaign. But are tariffs a good thing for the economy? No, said a Morningstar economist during a recent webinar.

Preston Caldwell, Morningstar’s chief U.S. economist, made the observations on tariffs during a presentation on the company’s outlook for the country’s economy.

Major policy changes generally require legislation, he said, and anything Congress passes is likely to be watered down during the negotiating process. So it’s premature to talk about policy changes that could occur when a new president and a new Congress take office in January.

“But the president can drastically change tariff rates with the stroke of a pen,” Caldwell said. “And it’s one issue where economists are pretty much unified – high tariff rates are bad.”

Tariff hikes far from certain

Morningstar predicts that Trump’s proposed tariff hikes could cause the U.S. gross domestic product to fall by 1.9%. A 10% uniform hike in tariffs would create a 1.4% drop in GDP while a 60% tariff on products imported from China would result in a 0.5% fall in GDP. Combined, the tariffs would have a 1.9% decrease in GDP.

The analysis further went on to assume a 32% probability that Trump would impose a 60% tariff on China while assuming a 7.5% probability of a 10% uniform hike in tariffs.

However, Caldwell said, although a president has immense executive authority on tariffs, it’s still far from certain that Trump would push these hikes through if elected.

Tariff hikes also could have an impact on inflation or interest rates, Caldwell said, “but that depends on a host of other factors such as how the tariff revenue is used – paying down the deficit or for tax cuts - and how the Federal Reserve responds to it.”

Soft landing expected; GDP growth strong

Looking ahead to the U.S. economy in the fourth quarter, Caldwell said Morningstar continues to expect a “soft landing,” which he described as a normalization of inflation without the economy undergoing a recession.

GDP growth continues to be strong, with the latest government figures showing GDP growing at a 2.3% annual rate on average since Q4 2019.

“That means the economy has not only recovered from the pandemic but indeed has succeeded the prepandemic expectations of what economic growth would be,” he said, adding that in January 2020, the Congressional Budget Office projected 1.8% annual GDP growth.

“That’s quite an achievement. It sets the U.S. apart from other economies, which have experienced much weaker growth in the past few years.”

Caldwell said Morningstar predicts a slight weakening in GDP growth in 2025 as several factors that prompted growth in the past several years will start to fade. But then as the Fed’s monetary easing starts to kick in, Morningstar expects growth to reaccelerate over 2026-2028.

Morningstar expects to see average annual inflation drop to 2.4% by the end of 2024, Caldwell said.

“If our forecasts for 2025 and 2026 continue to play out, we expect inflation to dip below the Fed’s 2% target. It will be very clear that the battle against high inflation will have been won.”

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