At the moment, the American economy feels a little bit like a hot August afternoon. The air is heavy and still, as lightning flashes on the horizon. The storm could sweep through and leave destruction in its wake. It could set in for a brief drizzle.
Or it could pass by in the distance, and take its fury elsewhere.
In this very humid metaphor, the electricity in the sky is the steep tariffs that President Trump has now imposed on most goods coming into the United States. It’s also his strict immigration curbs, mass firings of government employees and the pullback in government spending.
Economists have been waiting for that multifaceted storm system to start showing up in the economic data. The signs are now unmistakable, but the severity of the impact remains unclear.
“It’s a really tough call,” said James Egelhof, chief U.S. economist with BNP Paribas, an international bank. He thinks the most likely scenario is that the economy is going through a soft patch, rather than entering a deep recession.
“What we are looking for in a cyclical downturn is a change in corporate behavior, that they have lost confidence in the expansion and are getting more risk-averse,” Mr. Egelhof said. “They pull back on employment, and they reduce hiring. Thus far we haven’t seen this shift.”
Plenty of indicators suggest inflation and the labor market are headed in the wrong direction.
After slowly sinking back to close-to-normal levels, price growth has sped up again, particularly in categories of goods that are heavily imported and now steeply tariffed. A measure of wholesale prices jumped to the highest level since November 2022.
Spending has held up, particularly among higher-income consumers, according to credit card data analyzed by Bank of America. But that could be an illusion, as people pay more for the same items, or stock up to get ahead of tariffs kicking in.
Cailey Locklair, the president of the Maryland Retailers Alliance, said her members had noticed customers accelerating their purchases to take advantage of discounts and sales tax holidays, knowing that price increases are probably around the corner.
“Shoppers are very uncertain about what tariffs could mean,” Ms. Locklair said. “Because of this uncertainty in the market, consumers were spending a lot more in July to start back-to-school early, to mitigate some of this.”
Economists are not surprised that tariffs are taking a while to filter into sticker prices. Mr. Trump’s policies have been mercurial: Sky-high duties on Chinese goods have come down, while those on Brazilian imports have jumped to 50 percent. Large categories have been exempted, like some electronics. Tariffs on others, such as semiconductors and pharmaceuticals, have been threatened but not yet imposed.
For the past several months, importers have also been able to mitigate the impact by bringing in inventory ahead of the tariffs. But for many countries, particularly those in Southeast Asia, that window has closed.
To understand why, consider what Elizabeth Sopher is dealing with. Ten years ago, she founded a company that makes fitted sheets with zippers to make them easier to put on beds. She had big plans to expand this year, with factory relationships in Israel, Bangladesh and China.
As Mr. Trump imposed and delayed his tariffs on nearly every country, Ms. Sopher was able to restock her warehouse in Denver without busting her budget. She hasn’t raised prices yet, and instead has been absorbing input duties — including 40 percent on sheets coming from China — by spending less on digital advertising.
“We’re high-priced as it is and just don’t feel we have much room to pass this on, at this moment at least,” said Ms. Sopher, who has 10 employees and contractors. That will change, however, as shipments arrive from Bangladesh with 35 percent tariffs, and from Israel with 15 percent tariffs.
“We would raise our prices to hit a level of profitability that makes us sustainable, for sure,” Ms. Sopher said. “We’re kind of hanging out there waiting to see what the total is going to be for us.”
It’s not just American importers. Foreign manufacturers have also been hesitant to commit to expansions in the United States, despite some high-profile announcements by the White House, because of uncertainty around what kind of tariffs they might have to pay on imported materials, and what obstacles they might face exporting to other countries. Investment in factories and similar buildings has drooped in 2025, after a surge the past few years.
John Lummus, president of the Upstate South Carolina Alliance, speaks often with foreign executives interested in his region, which has attracted companies like BMW and Michelin to set up factories. His conversations lately have not been promising.
“The U.S. has always been seen as the most stable place to make an investment, and also the best market in the world to produce and sell,” Mr. Lummus said. “Now I think we are seeing differences in that perception.”
That kind of hesitance, when expanded across the economy, adds up to a frustrating picture for workers looking for new opportunities — or young people looking for their first job.
Economists’ understanding of the health of the labor market shifted sharply in early August, when the Bureau of Labor Statistics reported large downward revisions to job creation over the past several months. For those without jobs, the outlook is difficult. The share of workers who have been out of work for more than six weeks is now at the highest level since November 2021.
However, layoffs are by no means spiking. The career transition consulting firm LHH reported that its business was up about 5 percent since last year, but that’s mostly because of increased displacement on account of artificial intelligence, as companies find ways to automate both middle-management and entry-level tasks.
“It’s not like profits are dragging in most sectors. I don’t see a recession happening,” said John Morgan, LHH’s president. “Most of the cuts that we see are not economically driven.”
One thing very likely keeping the unemployment rate tame is Mr. Trump’s far-reaching drive to reduce the number of immigrant workers in the United States. That is draining the supply of workers at the same time that labor demand fades.
The flow across the southern border has essentially stopped. The White House has been steadily terminating programs that extended legal status to people from war-torn countries, which J.P. Morgan estimates could result in 1.1 million fewer people participating in the work force in the coming months.
It’s difficult to determine whether job growth is being dragged down because employers need fewer workers or because they can’t find people to fill positions. In this case, it’s likely that both forces are at play. And this is where the two big variables in the economy — employment and prices — start to interact with each other.
If the unemployment rate remains where it has been for more than a year, between 4 and 4.2 percent, there is more risk that tariff-driven price increases could turn into persistent inflation. With enough employment options, workers feel they have the leverage to bargain for big enough pay increases to cover their rising costs.
Ajay Rajadhyaksha, global chairman of research at Barclays, doesn’t think the Federal Reserve needs to fret about an upward price spiral too much at this point.
“If they worry about the labor market now, it should not be about it overheating, even with so many potential workers disappearing, because it does seem clear that we are not creating a lot of jobs,” Mr. Rajadhyaksha said. “The concern is that tariff-driven inflation meets a labor market that causes wages to skyrocket.”
There’s no guarantee that a weak labor market will keep prices in check, however. The worst outcome, sometimes referred to as “stagflation,” describes a situation in which prices spike, companies lay off workers, and consumption craters. In that scenario, the Fed would be left with two bad choices. It could cut interest rates to shore up the economy, and risk stoking inflation. Or let the labor market flounder, while getting inflation under control.
The economy isn’t there yet. But companies are treading very carefully, anticipating that things might get worse. In a survey of midsize businesses by the National Center for the Middle Market, a research group housed at Ohio State University, respondents said they were anticipating the lowest revenue and employment growth of the postpandemic period.
Mark Valentino, president of business banking at Citizens Bank, said the impacts of Mr. Trump’s policies would really start to have an impact in the second half of the year.
“Now things are getting real, and the next four to six months will be a telltale sign of whether or not these tariffs truly hurt the economy in bigger ways than we currently see,” Mr. Valentino said.
The stock market may be at record highs, he noted, but it largely reflects the fortunes of a few large firms driven by exuberance around artificial intelligence.
“That kind of optimism is not what we’re seeing on Main Street right now,” he said.
Colby Smith contributed reporting.
Lydia DePillis reports on the American economy for The Times. She has been a journalist since 2009, and can be reached at [email protected].
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