Viewpoints: 2025

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.

The Federal Reserve Bank of Philadelphia’s state coincident indexes in February were similar to January, generally on the soft side in January. In the one-month changes, West Virginia led with a .62 percent gain, with no other state up as much as .5 percent. Nine states were down, with Washington’s .2 percent drop being the largest. Over the three months ending in February, four states were down, all by small amounts West Virginia and South Carolina were the only states seeing gains above 1 percent. Over the last twelve months, three states were down, and twelve others saw increases of less than one percent. No state had an increase higher than four percent, and only two were higher than three percent. Utah’s index rose 3.32 percent, while Michigan was down 1.64 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .81 and 2.51 percent. Both measures appear to be somewhat stronger than the state numbers. These indexes are very dependent on payroll employment numbers, and in both January and February the sum of state payroll employment changes was less than the national figure.

The Trump administration’s sweeping new tariffs, announced on April 2nd, may be pitched as a tool to restore US industrial greatness—but the global economy has moved on. Despite the political appeal of reshoring manufacturing and punishing trade partners, tariffs are a blunt instrument trying to shape a world that no longer exists.

Let’s start with the basics: the structure of global demand and production has changed. In the 1980s and 1990s, global trade was dominated by container ships full of cars, clothing, and household goods. Today, much of the economic value generated by advanced economies is invisible, weightless, and digital. A book bought on an iPhone doesn’t pass through customs. A call between colleagues in New York and Singapore doesn’t register on a trade ledger. The software used to design a prototype in Boston may be sent instantly to a 3D printer in Stuttgart—and no goods are “imported” in the traditional sense.

Tariffs don’t touch any of that. They are analog policy tools in a digital world.

Meanwhile, consumer preferences have shifted—especially in aging economies like the US, Europe, and Japan. Older populations demand more healthcare, more convenience, and more services. They are less interested in accumulating physical goods and more inclined to consume time-saving solutions: app-based services, digital content, personalised experiences. These are not products that are made in factories—they are composed of intellectual property, design, code, and networks.

In this landscape, intangibles rule. The most valuable US exports aren’t cars or machinery—they’re ideas, algorithms, entertainment, and software. The US remains the global leader in high-value services—finance, cloud computing, enterprise software, biotech R&D, education, and media. These exports are often delivered without crossing a border, and they generate high margins without requiring massive industrial footprints. The global demand for American creativity, standards, and know-how has only grown.

The US current account deficit has nearly tripled over the past eight years, covering the previous two administrations. With the current account deficit now running at roughly $1.1 trillion per year or 3.7 percent of GDP, the new administration has announced across-the-board increases in tariffs in order to level the playing field on trade. We wondered how we got here and if the causes might highlight ways to solve the problem.

In the April 3 Viewpoints article titled Liberating the Downside, Andy Cates and Kevin Gaynor discussed the prospects for narrowing the US current account deficit through tariffs in the context of the national accounts. One way to look at the national accounts is though the following identity

(M – X) = (I – S) + (G – T)

where (M – X) is the current account deficit, (I – S) is the private borrowing need, and (G – T) is the public borrowing need or the government budget deficit. This equation offers a valuable framework to identify the underlying causes of the undesirable rise in the US current account deficit.

Based on a combination of Bureau of Economic Analysis NIPA Tables 3.1, 4.1 and 5.1 (all these data can be found in the Haver USNA database), it is clear that the interplay between saving and investment drives the current account, with some small adjustments for the statistical discrepancy.

Trump announced sweeping new tariffs in a lengthy, rambling speech that if fully implemented would likely push the U.S. economy into recession and significantly slow global trade and economic activity, but based on Trump's history, the wisest interpretation is that he is open to bargaining with the leaders of trading nations and ultimately the effective tariffs will be lower and their economic impacts will be moderated. Even if the tariffs are moderated through negotiations, they are unambiguously negative, as markets are now signaling.

Invoking his authority under the International Emergency Powers Act of 1977 (IEEPA), President Trump assessed a 10% tariff on all imports effective April 5, and additional reciprocal tariffs on nations that Trump perceives disadvantage the U.S. through some combination of their own tariffs, fees and taxes. Trump bases these reciprocal tariffs on the simplistic calculation of each nation’s bilateral trade surplus with the U.S. divided by its exports to the U.S. According to the White House Fact Sheet of April 2, the IEEPA allows for Trump to modify the tariffs, either up or down, “if trading partners retaliate or decrease the tariffs [or] if trading partners take significant steps to remedy non-reciprocal trade agreements and align with the United States on economic and national security matters”.

These tariff pronouncements are both shaky and murky. The reciprocal tariffs are based on extraordinarily naïve calculations that defy economic common sense. And they are seemingly offered as bargaining tools. This makes an assessment of the magnitude of the tariffs and their impacts difficult.

A full version of this commentary is available here.