Viewpoints: 2025

Looking a bit deeper into early April economic data, I detect some worrisome issues regarding the health of the economy. Let’s start with the April 2025 Nonfarm Employment Survey, specifically, the Manufacturing Index of Aggregate Weekly Hours for the manly guys on the factory floor. (We don’t care about the supervisors and suits in the C-suites because we know that they don’t produce things you can touch and feel.) This index of aggregate weekly hours is a proxy for output in the manufacturing sector. It represents the number of factory-floor workers times the weekly hours they toiled. This index does not take into consideration any changes in the workers’ productivity. As you can see in Chart 1, this index contracted by 5.6% annualized in April. One month does not a trend make, but …

Who is most and least vulnerable? Least vulnerable: Russia, Brazil, Philippines, South Africa, Indonesia, India, and Malaysia. Most vulnerable: Vietnam, Taiwan, Mexico, Thailand, and the EU.

In this analysis, we examine 16 economies—including the EU, Canada, Mexico, Japan, eight additional Asian countries, and the BRICS. Each is ranked from 1 (least vulnerable) to 16 (most vulnerable) based on four key variables:

1. US reciprocal tariff rates 2. The US trade deficit with each country 3. Dependency on exports to the US 4. Overall economic dependency on exports

An aggregate vulnerability score is calculated by summing the rankings across these metrics. A higher total score indicates greater vulnerability to US trade actions. Investment recommendations are drawn from both a country's exposure to US tariffs and its business cycle fundamentals. While the framework may initially appear complex, its logic becomes clearer through the analysis.

Tariff Exposure

Figure 1 illustrates the total tariff increases—both proposed and enacted—by the US on a country-by-country basis. This includes the reciprocal tariffs announced on April 2 and previous measures such as the 25% duties on imports from Mexico and Canada. The effective US tariff rate on imports from China now stands at a staggering 145%.

China ranks as the most exposed (rank 16), followed by Vietnam (46% tariffs, rank 15), Thailand (37%), and Taiwan and Indonesia (32%). Russia evaded Trump's 10% global US import duty, primarily due to the existing sanctions framework. It is also likely that, in a bid to facilitate a Ukraine-Russia peace deal and negotiate a minerals agreement, Trump chose not to further antagonise Putin. Brazil and the Philippines have also seen relatively modest tariff hikes.

The US dollar has rapidly become the central focal point for investors grappling with the fallout from recent US trade policy shifts. As markets absorb the economic and geopolitical implications of a more confrontational US trade stance, attention has turned squarely to the dollar—not just as a barometer of financial sentiment, but as a potential transmission channel for broader global instability. Its role at the heart of the international monetary system, coupled with the scale of the US current account deficit and reliance on capital inflows, makes any significant shift in dollar dynamics a matter of systemic importance. With yield differentials, trade balances, and competitiveness all now under scrutiny, the dollar is increasingly where macro fundamentals, policy risk, and global capital flows converge.

This shift, moreover, carries profound implications. When trade policy becomes a source of financial volatility rather than a tool for economic rebalancing, it raises the risk of destabilizing the very capital flows that sustain the US external position. As the world's primary reserve currency, the dollar is embedded in the global financial plumbing—from trade invoicing to cross-border lending and portfolio flows. Sudden policy-driven movements in the dollar can reverberate far beyond US borders, tightening financial conditions in emerging markets, disrupting asset allocation globally, and undermining confidence in the predictability of the international monetary system. In this context, US trade wars are no longer just bilateral disputes—they are global macro events, with the dollar serving as the principal shock absorber.

Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But the April US tariff actions—the dollar has weakened markedly even as the yield spread between the US and Germany has widened – see first chart below. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act was signed into federal law on August 9, 2022. The CHIPS Act provides various subsidies for the production of semiconductors in the US. Semiconductors are an integral component in numerous kinds of equipment, including defense equipment. A major impetus for passing the CHIPS Act was national security.

The encouragement of domestic semiconductor production seems to be coming to fruition. In the advance estimate of Q1:2025 real GDP, released on April 30, 2025, the annualized change in the production of real information processing equipment skyrocketed to 69.3%, as shown in Chart 1.

The Federal Reserve Bank of Philadelphia’s state coincident indexes in March were a touch firmer than in February, but not robust. In the one-month changes, West Virginia was on top with a .77 percent gain, while South Dakota, Indiana, Montana, and South Carolina were also up more than .5 percent. Nine states were down, with Connecticut’s .23 percent drop being the largest. Over the three months ending in March, five states were down, with Massachusetts off .48 percent (Connecticut and Rhode Island also showed declines, obviously suggesting some softness in southern New England). West Virginia was up 2.06 percent, and South Carolina, Montana, Indiana, and South Dakota also rising more than 1 percent. Over the last twelve months, Iowa and Michigan were down, and twelve others saw increases of less than one percent. No state had an increase higher than four percent, and only four were at or higher than three percent. Utah’s index rose 3.33 percent, while Michigan was down 1.48 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 2.44 percent. Both measures appear to be a bit weaker than the state numbers.

March was another month of little change in state labor markets. The sum of payroll changes among the states was close to the national result, and revisions eliminated most of the gap initially seen for February. Six states saw statistically significant gains in jobs in March, with Pennsylvania increasing by 20,900 and Missouri up .5% (Texas reported a larger, not statistically significant, gain than Pennsylvania). A few states had insignificant declines.

Three states (Connecticut, Massachusetts, and Virginia) had statistically significant changes in their unemployment rates, with Connecticut’s .2 percentage point rise being the larges. Indiana reported a significant .2 percentage point drop. The highest unemployment rates were in Nevada (5.7%), DC (5.6%), Michigan (5.5%) California (5.3%), and Kentucky 5.2). Hawaii, Montana, Nebraska, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.8% was yet again the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.3% and the island’s job count moved up by 800.

The decline of US manufacturing and the rise of Chinese manufacturing has preoccupied policymakers over the past 25 years. It has resulted in the latest effort to use tariffs to try to drive domestic and foreign manufacturers back to the United States and limit trade disparities with China. This idea of bringing back manufacturing to the US is so ingrained in people’s thinking that it almost seems odd to question if that is a goal the US should pursue.

The facts are clear: Employment in the US manufacturing sector from 1965 to 2000 was fairly stable in a range between 17 million and 19 million. However, there was an abrupt shift away from manufacturing in the early 2000s, to a new lower range of 11.5 million to 13 million, which was nearly a 6 million decline, or 33 percent (see chart 1).

The current moment in global economic policymaking is marked less by direction than by dissonance. Nowhere is this more evident than in the US, where the return to tariff-based policy in early 2025 has underscored the contradictions at the heart of its economic agenda. Yet just as markets and policymakers began to absorb the implications of a more protectionist stance, Washington has partially reversed course—modifying or delaying some of the proposed measures. However, this retreat, rather than offering clarity, has only deepened global uncertainty, complicating the outlook for inflation, growth, and international cooperation.

Forecasts reflect this disorientation. Across major economies, expectations for GDP growth in 2025 have been revised downward in recent months, while inflation projections have edged higher (charts 1 and 2). This divergence—a hallmark of stagflation risk—signals a world in which economic constraints are no longer primarily demand-driven, but stem from structural disruptions to supply and trade flows. While not yet systemic, this shift poses mounting challenges for policymakers.