Confusion from tariffs and other policies cause uncertainty

NRF reports that economic fundamentals for retail appear solid, though there is some concern as to how tariffs might impact retailers in the future.

Halfway through the year, it is still difficult to predict the impact new tariffs and other government policies will have on the U.S. economy, the National Retail Federation reports.

“This year began with high expectations for the strength of the U.S. economy,” says Jack Kleinhenz, chief economist. “Since then, anxiety and confusion have taken center stage in the economy and financial markets as uncertainty over public policy has intensified. It was difficult to judge how policy changes would impact the economy in early 2025 and it remains so now.”

Kleinhenz notes that economic fundamentals “appear solid” at this time, but uncertainty remains. “There are many crosscurrents surrounding tariffs, immigration and deregulation, and everyone is sorting through what the tariff rates are going to be, how they will impact inflation for retail products and, importantly, how long they will be in place,” he says.

In July, NRF’s Monthly Economic Review reported that economic growth has been holding up “relatively well” this year despite uncertainty about the future. GDP fell at an annual rate of 0.5% in the first quarter of the year, but that was mostly due to a surge in imports driven by tariff announcements. In contrast, private final sales to domestic purchasers, which is a measure of consumer and business spending, was down 2.9% in the previous quarter but showed continued strength in private sector demand.

Year-over-year inflation as measured by the Personal Consumption Expenditures Price Index ticked up to 2.3% in May from 2.1% in April. Unadjusted for inflation, personal income and consumer spending were both up 4.5% in May. Core retail sales as defined by NRF were up 3.9% year over year both in May and for the first five months of the year.

Additionally, the labor market is performing better than expected, with employers adding 147,000 jobs in June, just above the monthly average of 146,000 over the past year, and the unemployment rate was largely steady at 4.1%. Job openings rebounded to 7.8 million in June, indicating continued demand for workers.

Tariffs have yet to be clearly seen in prices. Kleinhenz explains that if the large increases in tariffs announced earlier this year take effect and are sustained, they will impact consumer prices, causing a downshift in spending that he expects to spill over into the labor market later in the year with higher unemployment.

Kleinhenz says the Federal Reserve is “quite unlikely” to cut interest rates this month but could be on track to do so this fall. He adds that the Federal Reserve officials are closely watching the “inflation psychology” of consumers and how their expectations about future inflation influence their current spending and savings decisions and whether they are influenced by short-term price increases.

The One Big Beautiful Bill Act spending measure was signed into law and had many moving parts that could alter the economic outlook, depending on how businesses and consumers react, Kleinhenz adds. NRF notes that the adoption of the bill, which provides some business incentives, “meaningfully reduces fiscal policy uncertainty.”