Viewpoints: 2025

It is generally understood that Gross Domestic Product (GDP) does not include the value of imports. It is, however, less well appreciated that in the System of National Accounts tariffs are treated as domestic value added. That is, customs duties are included in GDP.

From the first to the second quarter of this year customs duties surged $170.7 billion, from $97 billion at an annual rate to $267.7 billion -- an annualized growth rate of 5700%! -- as new tariffs imposed by the Trump Administration took effect. All else equal, if that increase in tariffs had immediately passed through to prices faced by final demanders of domestic product, the annualized rate of change in the GDP price index would have spiked nearly 3 percentage points in the second quarter. As it happened, GDP inflation in the second quarter was tame at 2.1%. Obviously, there were tariff slips twixt cup and lip.

Europe recovery to continue

The euro area’s economic performance in 2025 has been uneven. The year began on solid footing, with GDP expanding by 0.6% QoQ in Q1, only to lose momentum in Q2 as growth slowed sharply to 0.1% QoQ, with output contracting in both Germany and Italy. This slowdown coincided with the peak of the U.S.-led trade war, which weighed heavily on net exports after their strong rebound earlier in the year.

Despite the softer second quarter, Europe’s business cycle upswing remains intact. As shown in Figure 1, the average return on equity for listed European firms moderated in the first half of the year compared with the same period in 2024. Yet the corporate profit cycle, which began in 2021, continues to advance. Key indicators—EBITDA, free cash flow, and retained earnings—remain well above pre-pandemic averages. Although earnings per share and cash flow softened slightly in 1H25, corporate balance sheets remain healthy and capable of supporting further investment in production capacity and employment.

From January to August the average tariff rate on all imported goods increased 9 percentage points, from 2.3% to 11.3%, while the price of those imports, recorded by the Bureau of Labor Statistics (BLS) excluding tariffs, was essentially unchanged. Hence, the price of imports, including tariffs, rose 1.113/1.023 - 1 = 8.5%, reflecting the full amount of the increase in tariffs (Chart 1, solid lines). This suggests the cost of the tariffs has been borne entirely by American businesses and consumers, with none of that cost passed backwards to foreign suppliers.

State real GDP growth rates in 2025:2 ranged from -1.1% in Arkansas (Mississippi fell at a 0.9% rate) to 7.3% in North Dakota. States in the Plains benefited from a turnaround in farm output after declines in the first quarter, and there were also increases in mining output in some of those. Arkansas and Mississippi were dragged down by losses in farm output. Strong increases in finance and information helped boost growth in states such as California, New York, and Massachusetts.

Personal income growth rates ranged from 10.4% in Kansas to 0.9% in Arkansas. In the majority of states, perhaps most notably Massachusetts, increases in transfer payments significantly swelled the income gains related to state GDP growth. Much of the transfer growth reflected the recent retroactive payments to some Social Security beneficiaries.

This release also included estimates of consumer spending by state for 2024. Given the marked lag in the release of these numbers, and their annual frequency, they are likely not of much interest in assessing current and perspective conditions, either for the nation as a whole or for individual states, though they may be of help in modeling state revenues.

The Federal Reserve Bank of Philadelphia’s state coincident indexes in August were on the soft side, but a touch better than the initial July results. In the one-month changes, while four states (Kentucky, Rhode Island, Colorado and Alabama) had increases above .50 percent, seven were down. Over the three months ending in August, Alabama was on top, with two other states (Kentucky and Colorado) also seeing increases above one percent. Five states saw declines, with Maryland down .60 percent. Over the last twelve months, Iowa was down, and four others saw increases of less than one percent. Alabama was the only state with an increase higher than four percent (Idaho was up 3.62 percent), and eight others were at or higher than three percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .38 and 2.25 percent. Both measures appear to be a bit lower than what the state numbers would have suggested.

The AI boom has revived the old promise that a wave of general-purpose technology will lift labour productivity everywhere. But sector mix matters. The chart below shows where recent job growth has actually happened: healthcare and social care. Since end-2023, employment in that sector has grown 3–4x faster than overall payrolls in the US, UK and Japan, pushing healthcare’s share of total jobs toward 14–15%. The euro area has been softer, but the direction is similar. Ageing populations and long-COVID backlogs are doing the heavy lifting. But the composition effect is awkward for macro optimists: healthcare is labour-intensive, highly regulated and only partly tradable—characteristics that usually come with lower measured productivity growth.

State labor markets were little-changed in August. Utah saw a statistically significant increase in payrolls and DC saw a drop. No other state had a significant change.

The unemployment rose a significant .2 percentage points in Delaware and Maryland, while increasing .1 percentage point in Minnesota. Colorado’s rate fell .3 percentage point, and Alabama was down .1.California. The highest unemployment rates were in DC (6.0%), California (5.5%), Nevada (5.4%), Michigan (5.2%), New Jersey, Ohio, and Oregon (all 5.0%). Alabama, Hawaii, Montana, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.9% was the lowest in the nation.

Puerto Rico’s unemployment rate edged up to 5.6% and the island’s job count rose 3,100.

At the start of the year, the consensus view was grim: the US-led world economy was heading into recession, inflation would spiral out of control, and global trade faced collapse. Yet, none of this has come to pass. Business-cycle indicators still show resilience, and neither a global trade downturn nor sustained inflationary pressure has materialised.

Global Exports: Resilient Despite Tariffs

The trade war has been disruptive but not disastrous. In the US, GDP contracted in the first quarter, largely because of a sharp rise in imports as manufacturers front-loaded inventories ahead of tariff deadlines. By the second quarter, domestic demand shrank 0.4% quarter-on-quarter as inventories slumped. Exports and residential investment declined, but consumer spending actually strengthened—hardly evidence of households buckling under tariff pressure.

The labour market has softened but isn’t collapsing. Unemployment at 4.3% is still below the pre-pandemic average of 5.1%, while August retail sales rose a brisk 5% year-on-year.

Surprisingly, the trade war’s impact on global trade has been modest. World exports dipped 6.5% from late 2024 to February 2025, only to rebound 13%, leaving shipments up nearly 6% year-to-date through May (Figure 1). The sharpest weakness came in April and May, immediately after tariff hikes, but the recovery was swift.

By comparison, past crises inflicted far greater damage. During the Global Financial Crisis, global exports collapsed by 47% in just eight months. Between 2014 and 2016, shipments fell 28% amid crashing commodity prices, a slowing China, and a strong US dollar. The pandemic caused a 33% peak-to-trough fall when economies shut down worldwide. Against this backdrop, the current downturn appears relatively mild.