Did We Miss The Apocalypse? Or Was It Just Postponed?

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The Last Judgment (Photo by Fine Art Images/Heritage Images via Getty Images).

Heritage Images via Getty Images

The Great Tariff Scare

It has been five months since “Liberation Day” (April 2), and we have all learned a lot – about trade policy, about American history (McKinley, Smoot-Hawley), and about the legal and technical mechanics of tariffs.

We have also learned something about the effects of psychic trauma on the professional classes. The announcement of a possible return to a high-tariff regime – a policy not seen in the United States for almost a century – elicited screams of alarm from economists, financial pundits, and politicians. It was called a “national crisis,” “Economic Armageddon,” and “the most profound, harmful and unnecessary economic error in the modern era.”

That last dire turn of phrase comes from a lead editorial in The Economist magazine, the epitome of establishment economic dogma since 1843 and known for its normally measured tone. Yet they railed on: “pathetic” – “flat-out nonsense” – “utterly deluded” – “bonkers” – “mindless vandalism” – “economic havoc” – “a catalogue of foolishness that will bring needless harm to America.” (Yes, all that fear and loathing was packed into just a single editorial.)

Others contributed a whole thesaurus of scare-words:

The handwringing addressed a range of Awfuls: higher inflation, a looming recession, a broken bond market, the loss of dollar dominance, the mass exodus of foreign investors from American markets, wrecked supply chains, crippled corporate earnings, and the general ruin of the liberal world order.

On August 29 a Federal Court declared the administration’s tariff program “invalid as contrary to law” – which cues up the decisive next step for the Supreme Court (though the timetable is uncertain and the tariffs remain in effect). As the question turns from the economics of tariffs to their legality, it is a good time to check the scorecard. How many of these negative consequences have come to pass, and what is the outlook for the future?

What If They Gave An Apocalypse And Nobody Came?

In most respects the negative impacts of tariff policies have been mild, nonexistent – or at least not evident so far. Here is a high-level summary:

Summary of Potential Negative Tariff Impacts

Chart by author

The details and numbers follow.

1. A Surge in Inflation?

Tariffed goods will carry higher prices. Back in April many assumed that this would cause higher inflation.

As explained in an earlier column, it’s not that simple – for at least five reasons.

First, the general view – even among those who hate the idea of tariffs – is that a tariff “tax” would appear as a one-time price hike, and not as a boost to inflation, which refers to an ongoing upward trend in prices. In his July press conference, Fed Chairman Jerome Powell saw “a reasonable base case that the effects [of high tariffs] on inflation could be short lived—reflecting a one-time shift in the price level. …And, in the end, we’ll make sure that that’s the case.”

Second, the scale of the potential tariff impact is small relative to the total economy. Tariff revenues for 2026 are projected to run about $300-400 billion – only about 1% of the total U.S. GDP. In the aggregate, tariffs would feel something like a 1% national sales tax. (As a point of comparison, a number of states have raised sales tax rates by 1% in recent years, including Minnesota, Wisconsin, Illinois, Indiana, Louisiana, Tennessee, Rhode Island, Mississippi… without provoking the fear of spurring higher inflation.)

Third, tariffs affect just part of the consumer’s “market basket” used to assess inflation. According to a study by the Boston Federal Reserve, only 17% of the components in the Core Personal Consumption Expenditure Index (PCE) are either directly or indirectly affected by tariffs. Looked at from this angle, a 15% tariff on 17% of the consumer’s market basket would equate to a 2.5% one-time impact (assuming no changes in behavior – see next paragraph). In fact, a very recent academic study led by Albert Cavallo of Harvard, based on pricing data from major U.S. retailers, found that actual tariff cost increases so far are right in line with this estimate.

Our event study analysis…shows that retail prices began rising within a week of the March 4 announcement [which previewed Liberation Day], with cumulative increases of up to 2.5% over the following months—consistent with gradual, yet sustained, pass-through.” – Cavallo et al, “Tracking the Short-Run Price Impact of U.S. Tariffs” (August 31, 2025)

A 2.5% one-time impact is not negligible, but it is hardly catastrophic.

Fourth, the dire forecasts all assume no change in behavior of consumers, producers, or policy-makers in exporting and importing nations. This is not realistic. If tariffed French wine becomes more expensive, consumers may reduce their consumption, or substitute California wine. Producers may shift production to lower-tariffed countries, and/or absorb some of the price increases to maintain market share. The New York Times reported on a Goldman Sachs study which found that consumers so far have borne only 10-40% of the cost of tariffs – producers and exporters have absorbed the rest. A more recent forward-looking Goldman report assumes that pass-through rates will increase over time, but will not reach 100%. The Federal Reserve has similar estimates.

Who Will Bear The Tariff Tax

Chart by author

Finally, exporting nations may allow their currency to depreciate relative to the dollar to offset the tariff impact. A 10% tariff combined with a 10% devaluation of the exporting country’s currency results in essentially no change in end-consumer pricing. This is exactly what happened in 2018 when tariffs were laid on Chinese goods.

The Numbers So Far

What do the broad inflation numbers actually show?

The rate of inflation measured by the year-over-year Consumer Price Index (CPI) is up a bit from April, but down from the January and below the 2-year average. July’s monthly increase was lower than April’s, with a compounded annual rate of change of just 2.38%. The 6-month rolling average of the monthly annualized rate was just 1.9% in July – the lowest in 5 years.

CPI July 2023-July 2025

Chart by author

Despite a barrage of new tariffs imposed by the Trump administration this year on dozens of U.S. trade partners, the prices of goods and services across the U.S. have defied many economists’ expectations and remained relatively stable. – CBS (August 21, 2025)

Some argue that the tariff impact on prices may not have shown up yet in the CPI. There is some support for this view. The year-over-year Producer Price Index (PPI) – which usually leads the CPI – ticked up in July to 3.3%, a bit above the average for the past three quarters (3.0%). The month-over-month increase in the PPI was the highest in 3 years. But if this turns out to be a one-time increase, it would not signal renewed inflation. And it is certain that consumers, producers and exporters will adjust to mitigate the impact of those increases, and the pass-through of producer price increases to the consumer level may be less than 100%. During the 2022-2023 inflationary episode, the PPI ran 2-3% higher than the CPI, indicating that producers absorbed a portion of their cost increases rather than passing them through to consumers.

In any case, many forecasters and policy-makers are backing off from the more extreme predictions of tariff-induced inflation. The Wall Street Journal recently asked “Why Haven’t Tariffs Boosted Inflation?” The inflationary forest fire that many expected to see has yet to ignite.

2. An Imminent Recession?

Recession forecasts gyrated wildly in the first half of the year, as outlined in a previous column. Initial assumptions reacting to the April surge in volatility in the financial markets were broadly pessimistic.

By July, sentiment had recovered, and stock market volatility (the VIX) had fallen back well below the 5-year and 10-year averages. The S&P 500 has notched up 32 new record highs since Liberation Day. GDP surged at a 3.3% annual pace in the 2^nd quarter. Hourly earnings rose at a 4% rate, well ahead of inflation. Personal consumption rose at an annualized rate of 6.5% in July (up from 2.5% in April).

Economists raced to revise their forecast upwards. Of the professional economists surveyed by The Wall Street Journal, 45 out of 52 saw a decreased probability of recession in the next 12 months, and only 2 saw a higher recession risk.

Consumer spending is “holding up” (a year-over-year gain of 4.7%) although growing slightly slower than the long-term average rate of increase (about 5.4%). According to Torsten Sløk, chief economist for Apollo, spending went through a pendulum swing following Liberation Day, but has now re-normalized.

Recent Trends in Consumer Spending

Chart by author, based on Tostren Sløk, Apollo

The Atlanta Federal Reserve’s GDPNow model currently (Sept 4) predicts 3.0% real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025. None of the economists in the Blue Chip survey cited are calling for negative growth.

Atlanta Fed GDPNow

Chart based on Atlanta Federal Reserve

Other forecasts project lower growth but none are showing a recession in the next 18 months. The Cleveland Federal Reserve bases its GDP forecast on the Yield Curve and currently calls for a 1.9% to 2.4% growth over the next five quarters. The Philadelphia Survey of Professional Forecasters now sees a 1.3% growth in Q3, and somewhat higher in 2026. The New York Fed’s Nowcast calls for 2.1% growth in Q3 and 2.3% growth in Q4.

NY Fed Nowcast

Chart based on New York Federal Reserve

In short, things just don’t look that bad. Even The New York Times has been brought to wonder: “The Economy Seems Healthy. Were the Warnings About Tariffs Overblown?”

Will there be a recession? Undoubtedly, at some point. As the business cycle… cycles, eventually growth will falter. There have been 12 recessions in the last 80 years. But the next one probably won’t be caused by tariffs per se.

3. A Crippled Treasury Bond Market?

Treasury Bonds are the classic safe haven investment, the bedrock of the global financial system. But in April, Morningstar alerted its clients that “the safe-haven status of US government bonds seems to be faltering…Markets are now favoring German government bonds as safe assets, while recession fears are eroding the confidence in the dollar and US government bonds as haven assets.” The Guardian agreed:” Experts say fears about unpredictable policy are creating a crisis of confidence in US bonds once seen as ‘risk free’.”

This scenario has not materialized. The 10-year Treasury Bond yield is lower – which means bond prices are higher – than on Liberation Day. They have gained almost 6% in value since the beginning of the year – hardly a downgrade scenario. (Meanwhile, German 10-year Bunds were modestly weaker, with prices down and yields up 13 basis points.)

10 yr Bond Yield Jan 2025-Aug 2025

Chart by author

[Breaking News: A scenario is developing in which tariffs may be a factor that is actually strengthening the U.S. Treasury Bond market.

“Investors this week grew alarmed over rising government debt levels in several advanced economies, including the United Kingdom, France and Japan, and demanded higher returns on long-term bonds issued by those governments. The Japanese government’s long-term borrowing costs hit an all-time high, while the yield on the 30-year U.K. bond rose at one point to its highest level since 1998, before easing.But even as U.S. public debt hit a new high of $30 trillion, investors remained relatively sanguine about U.S. Treasury securities. The yield on the 30-year Treasury bond briefly flirted with 5 percent this week but has risen over the past month much less than other government bonds. Investors are taking comfort from the Congressional Budget Office’s estimate that tariffs will deliver roughly $3.3 trillion in the next decade, easing worries over an otherwise shaky financial outlook. ‘The U.S. is outperforming because actually our [budget] deficit is marginally better with tariffs. Forget the economic justification of tariffs. It is raising a lot of revenue.’”]

4. A Weakened Dollar?

Some of the most alarming predictions in April concerned the potential loss of the dollar’s status as the world’s dominant reserve currency. “Tariffs turbocharge de-dollarization: World sells US dollar assets, seeking alternatives.” A Deutsche Bank economist was definitive: “The damage has been done. The market is reassessing the structural attractiveness of the dollar as the world’s global reserve currency and is undergoing a process of rapid de-dollarisation.”

The Fed’s broad U.S. dollar index declined about 5% in the 2^nd quarter. It held steady through July and August, above the 5-year and 10-year averages.

US Dollar Index

Chart by author

The Federal Reserve’s July report painted a positive picture. In “The International Role of the U.S. Dollar – 2025 Edition” almost all of the metrics related to the dollar’s prominent role in international trade and finance show a strengthening of the dollar’s position through the first half of this year.

“The depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets…The dollar remains by far the dominant reserve currency and only returned to about the share it had in 1995. Notably, it is basically unchanged since 2022.”

The report concludes “the dollar will likely remain the world’s dominant international currency for the foreseeable future.”

“The U.S. dollar share of international payments is about 50 percent and has even slightly increased in recent years. If intra-euro area payments are included, the dollar share is even higher at about 60 percent.”

There is a caveat: “Given that most data on international dollar usage is available with a lag, this note is not yet able to show any potential results of the change in the U.S. credit rating or changes to tariff rates.” Still, it is difficult to discern a “rapid de-dollarization” crisis.

5. Foreign Investments Fleeing the U.S.?

Apparently not. Foreign ownership of both short-term and long-term Treasury bonds has increased since April. The percentage of U.S. equities and Treasury bonds owned by foreign investors has tripled in the last 30 years. Since Liberation Day, the trend has intensified.

“While foreigners were selling US assets in April after Liberation Day, they have come back as big buyers of US assets in May and June. In other words, the “sell America” trade was basically only in April.” –Torsten Sløk, Apollo

6. Global Trade Impaired?

Many observers worried that Liberation Day tariffs would permanently damage global trade networks.

“Global trade flows could fall by 4% to 9%, while US exports and imports could shrink by 12% to 31%, depending on the tariff scenario. Trade flows could collapse entirely if tariffs approach or exceed 60%.” (BBVA analysts – June 2025)

Again, this has not happened. According to the United Nations Trade & Development (UNCTAD), global trade grew by $300 Billion in the 1^st half of 2025. Trade volumes have been increasing (year over year) for the past 6 quarters.

Global Trade Volumes

Chart by author

The total volume of U.S. trade (imports and exports) was higher in July than in any month in 2023 or 2024. The overall picture for world trade and for American trade does not (yet) show any signs of impairment.

That said, some trading relationships will likely be restructured. Trade patterns between the U.S. and China have changed significantly in the last year. Total bilateral trade volume declined by 1/3^rd from the 1^st quarter to the 2^nd quarter. It then rose 25% in July. The average monthly trade deficit has been cut almost in half since Liberation Day. Tariffs must certainly have played a role.

However, the realignment of the US/China trade pattern has been an ongoing process over several years, driven mainly by geopolitics. It is a reminder that tariffs are not used solely for economic purposes; they are also wielded as instruments of foreign policy.

7. Supply Chains Wrecked?

Some supply chain experts were deeply concerned by Liberation Day. The CEO and founder of supply chain logistics unicorn Flexport raised the alarm to panic levels.

“If they don’t change the tariffs, it’s going to be an extinction-level, asteroid-wiping-out-the-dinosaurs kind of event. Only these aren’t dinosaurs. These are dynamic, healthy businesses.”

In its reporting Yahoo Finance quantified the potential carnage: “Eighty percent of small American businesses that buy from China will ‘just die.’”

Shipping was projected to be in crisis. One logistics intelligence company wrote:

“A trade crunch is coming for US ports. Tariffs have led to cancellations of scheduled container ships from China to the US …Data shows that inbound trade at major US ports is facing an imminent crunch as Mr Trump’s protectionist trade policies take hold.” (May 7)

Or maybe not. Container shipping costs have been falling. The New York Federal Reserve’s measure of Global Supply Chain Pressure showed that July’s level of stress decreased, and is approximately now equal to the long-term average.

Supply Chain Stress

Chatt by author

The GEP Supply Chain Volatility Index – based on a monthly survey by S&P Global of 27,000 companies in 40 countries – fell in August, and has declined significantly since the beginning of the year. Lower supply chain volatility indicates considerable slack in the global trade network.

It has been widely commented that one of the outcomes of the severe disruptions during the pandemic (2020-2022) was a general improvement in the management of supply chains and positioning for greater resilience. According to S&P Global, “companies are putting in place contingencies: stockpiling inputs, reshaping supplier networks, near-shoring operations, and securing supply chain financing.” This effect may cushion much of the potential impact of tariffs on global logistics.

8. Corporate Profits Savaged?

Many expected that corporate profits would be sacrificed to tariffs. Some companies have alerted investors to the prospect of significant lost earnings, including General Motors, Ford, Caterpillar, Apple, and others.

And yet, overall, the revenue of companies in the S&P 500 index rose 6.4% in the 2^nd quarter and earnings grew 11.9%. A large majority of U.S. companies(81%) surpassed analysts’ estimates (the highest percentage of earnings beats in 4 years). Corporate profit margins for all U.S. companies rose, and are close to their all-time high, well above the pre-pandemic levels. Corporate profits for the S&P 500 were even higher (12.8%).

Corporate Profit Margins 2015-2025

Chart by author

The trend continues. According to Factset, earnings in July and August rose – the first time in 5 quarters that the initial two months of the quarter have shown an increase. Companies offering positive guidance on 2025 earnings outnumbered those providing negative guidance (62% to 38%). Analysts’ earnings forecasts for the next year and a half are bullish.

Analysts’ Earnings Forecasts for the S&P 500

Chart by author

Corporate America is doing well, and is expected to continue to do very well. Tariffs may take a toll, and some companies may be particularly affected, but the earnings collapse that was forecast in April has not materialized.

Summary

So far, the impact of the tariff storm has been rather mild – but there are two qualifications.

First, many of the threatened tariffs have not yet been implemented. Pauses, negotiations, and now the legal questions facing the administration’s tariff program mean that the substantive impacts of these tariffs (as opposed to the psychological shock of the announcements) have not yet been felt – and may not be if the courts nullify these measures.

Second, it has only been five months since April 2. Economists like to cite the famous “long and variable lag” before the impact of policy initiatives are fully manifest. Trade patterns may take time to adjust. Some of the behavior of the economy in the 2^nd quarter was anticipatory, and transitory. Inventory build-ups boosted trade volumes, and buy-ahead spending by households pushed up consumer expenditures.

Some say it’s only a matter of time before the asteroid returns. “America cannot dodge the consequences of rising tariffs forever.”(The Economist)

That said – end-of-the-world predictions have a long and so far nearly perfect record of not coming true. When shocks occur, economists often assume that the agents in the economic system (consumers, producers, regulators) will not react except in very limited and mechanical ways. But people do react. Shocks are anticipated, and contingencies put in place. Supply chains are malleable. Consumers shift their purchasing patterns. Producers and exporters get clever about mitigating the impact of tariffs (just as with all forms of taxation).

It is still early in this process, and it may be that some of these negative trends will start to emerge in time. But the scorecard so far is neutral to encouraging – or at least not apocalyptic.