National Retail Federation Chief Economist Jack Kleinheinz said it remains difficult at the halfway point of 2025 to predict the impact of new tariffs and other government policies on a U.S. economy that started the year with high hopes.
The NRF July Economic Review stated “economic growth is holding up relatively well” so far this year despite uncertainty about the future. Still, GDP fell at an annual rate of 0.5% in the first quarter, mostly because of a surge in imports driven by tariff announcements, according to the review. In contrast, private final sales to domestic purchasers, a measure of consumer and business spending, gained 1.9% year over year. Although down from 2.9% in the previous quarter, the positive figure indicates private sector demand hasn’t slowed as much as some observers feared, according to NRF.
Year-over-year inflation as measured by the Personal Consumption Expenditures Price Index, a metric favored by the U.S. Federal Reserve, ticked up to 2.3% in May from 2.1% in April. Unadjusted for inflation, personal income and consumer spending both grew 4.5% in May. Core retail sales, as defined by NRF — based on U.S. Census Bureau data, but excluding automobile dealers, gasoline stations and restaurants — advanced 3.9% year over year in May and for the first five months of the year.
At this point in the year, Kleinhenz observed, tariffs have not yet emerged as a major factor in overall retail 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 noted a day after the Trump administration extended the end of the pause from July 9 to August 1 on potentially higher reciprocal tariffs on goods from several countries.
The labor market has performed better than expected, with employers adding 147,000 jobs in June, just above the monthly average of 146,000 over the past year as the unemployment rate remained around at 4.1%. Job openings rebounded to 7.8 million in June, “indicating continued demand for workers” and exceeding the 7 million people unemployed, Kleinhenz said.
Although the labor market has been solid overall, it’s worth noting that payroll services provider ADP saw a downturn in private sector employment in June.
“This year began with high expectations for the strength of the U.S. economy,” Kleinhenz added, with strong 2.8% year-over-year growth in gross domestic product in 2024 that was led by consumer spending and helped by business and government outlays. “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.”
Kleinhenz added, “Economic fundamentals appear solid at this juncture, but uncertainty is pervasive. 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 maintained the Federal Reserve is “quite unlikely” to cut interest rates this month, but it could be on track to do so this fall. In the meantime, Fed officials are closely watching what he characterized as the “inflation psychology of consumers, or how their expectations about future inflation influence their current spending and savings decisions, and whether they are influenced by short-term price increases.”
Although disquiet is difficult to quantify, an Economic Policy Uncertainty Index developed by economists at Stanford and Northwestern universities has fallen by half since April, when it hit its highest level since the pandemic.
With President Trump’s “One Big Beautiful Bill Act” spending measure signed into law, there are ”many moving parts” that could alter the economic outlook depending on how businesses and consumers react, Kleinhenz concluded. Nonetheless, adoption of the bill, which provides business incentives, permanent tax cuts for individuals and measures to induce more workforce participation at least reduces fiscal policy uncertainty.
