Halfway through the year, it is still difficult to predict the impact that new tariffs and other government policies will have on the US economy, National Retail Federation Chief Economist Jack Kleinhenz said.
“This year began with high expectations for the strength of the US economy,” Kleinhenz said, noting strong 2.8 percent year-over-year growth in gross domestic product in 2024, driven by consumer spending and supported by both business and government expenditures. “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.”
“Economic fundamentals appear solid at this juncture, but uncertainty is pervasive,” Kleinhenz said. “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.”
Kleinhenz’s comments came in the July edition of NRF’s Monthly Economic Review, which stated that “economic growth is holding up relatively well” so far this year, despite ongoing uncertainty. Gross domestic product declined at an annual rate of 0.5 percent in the first quarter, largely due to a surge in imports driven by tariff announcements. In contrast, private final sales to domestic purchasers—a key measure of consumer and business spending—rose 1.9 percent year over year. Although down from 2.9 percent in the previous quarter, the figure reflected continued strength in private-sector demand and suggested that “the slowdown has been less than feared.”
Year-over-year inflation, as measured by the Personal Consumption Expenditures Price Index, increased to 2.3 percent in May from 2.1 percent in April. Unadjusted for inflation, both personal income and consumer spending rose 4.5 percent in May. Core retail sales—as defined by NRF and based on Census Bureau data excluding automobile dealers, gasoline stations, and restaurants—increased 3.9 percent year over year in both May and for the first five months of the year.
The labor market is performing better than expected. Employers added 147,000 jobs in June, just above the monthly average of 146,000 over the past year, and the unemployment rate remained largely steady at 4.1 percent. Job openings rebounded to 7.8 million in June, indicating continued demand for workers and exceeding the 7 million people unemployed.
Tariffs have not yet clearly affected prices. “However, if the large increases in tariffs announced earlier this year take effect and are sustained, they will infiltrate consumer prices, causing a downshift in spending that is likely to spill over into the labor market later in the year with higher unemployment,” Kleinhenz said.
Kleinhenz also said the Federal Reserve is “quite unlikely” to cut interest rates this month but could be on track to do so in the fall. In the meantime, Fed officials are closely monitoring the “inflation psychology” of consumers—that is, how expectations about future inflation influence current spending and saving decisions, and whether those expectations are driven by short-term price increases.
While uncertainty is difficult to quantify, the Economic Policy Uncertainty Index—developed by economists at Stanford and Northwestern—has fallen by half since April, when it reached its highest level since the pandemic.
With the One Big Beautiful Bill Act now signed into law, there are “many moving parts” that “could greatly alter the economic outlook” depending on how businesses and consumers respond, Kleinhenz said. Nevertheless, adoption of the bill—which includes business incentives, permanent tax cuts for individuals, and measures to increase workforce participation—“meaningfully reduces fiscal policy uncertainty.”
