Morgan Stanley economists have projected that implementing proposed Republican tariff increases would raise inflation and negatively impact U.S. economic growth, ultimately reducing employment.
“If the proposed tariffs are fully implemented, we anticipate a short-term rise in inflation and a delayed slowdown in GDP growth,” wrote Seth Carpenter and his team at Morgan Stanley in a report on Monday (Sep 30).
The team modeled a scenario where Donald Trump wins the presidency and swiftly enacts an additional 10% tariff on global imports, along with a 60% increase on imports from China. This would result in tariffs averaging 25% to 35% for roughly half of U.S. industries, according to their estimates.
“The inflationary effect would be more immediate, based on historical patterns,” the economists noted. Their model predicts a 0.9 percentage point increase in the PCE price index – the Federal Reserve’s preferred inflation measure – over a year.
Regarding economic growth, the higher tariffs would reduce both investment and consumer spending, which would outweigh any positive effects from decreased imports. GDP growth is expected to slow by 1.4 percentage points “over several quarters,” the bank stated.
Clear trajectory According to the model, monthly U.S. job growth would decline by 50,000 to 70,000 jobs. So far this year, job gains have averaged 184,000 per month.
“The scale of the economic impact” will depend on various factors, including the extent of the tariff hikes, their timing, potential retaliation from trading partners, and how currency markets respond, Carpenter and his team wrote. “But the overall direction is clear.”
The Trump campaign did not immediately comment on Monday. Earlier this month, when asked about forecasts predicting a negative effect on U.S. growth from tariff increases, the campaign pointed out that experts had previously underestimated the economic boost following Trump’s 2016 victory. (Source: Bloomberg)
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