As the United States approaches the midpoint of 2025, its economy finds itself navigating a minefield of uncertainty, policy shifts, and growing global tension. While the full picture will crystallize once the first-quarter GDP figures are released, early indicators already paint a complex and somewhat troubling economic landscape. A mixture of softening sentiment, rising prices, policy-driven headwinds, and global trade friction has set the stage for what could be a pivotal moment in the post-pandemic economic cycle.

The Beige Book: Business Anxiety in a Time of Tariffs

The Federal Reserve’s latest Beige Book—a qualitative snapshot of economic conditions across its 12 districts—reveals a striking narrative. What used to be a broad survey of employment and consumer trends has now become, more than ever before, a mirror reflecting the nation’s growing anxiety over trade policy.

In the April edition, only five districts reported slight growth. Three reported little change, and four saw modest to slight declines. Across nearly all regions, one theme emerged: pervasive uncertainty tied to international trade tensions. Notably, the Beige Book emphasized that nonautomotive consumer spending declined, while auto purchases surged—likely in anticipation of tariff-driven price hikes. At the same time, both personal and business travel declined, particularly among foreign visitors, further denting service-sector strength.

Labor markets offered mixed signals. Employment growth was marginal, with hiring noticeably slower in consumer-facing sectors. Meanwhile, government-funded roles saw the steepest employment cuts. A “wait-and-see” mentality prevailed, with many firms opting to delay or reduce hiring plans. There were even early signs of preparatory layoffs—a red flag hinting that businesses expect conditions to worsen before they improve.

Complicating matters, labor availability remained generally adequate, but sector-specific labor shortages were reported due to shifting immigration policies. As the policy landscape continues to evolve, so too does the composition of the American workforce.

Tariffs and Prices: The Hidden Tax on Growth

One of the clearest signals from the Beige Book was the steady upward pressure on prices. Most districts reported modest to moderate increases in input costs. Tariffs were consistently cited as a leading cause. Companies across sectors noted that suppliers had already issued price increase notices, and many businesses had begun passing on these costs to consumers—either through direct surcharges or shortened pricing commitments. Margin compression was common, especially as demand growth remained tepid, making it harder for firms to maintain profitability.

The latest data suggests this pricing pressure is accelerating. According to S&P Global’s April flash PMI, goods and services prices rose at their fastest pace in over a year. In manufacturing, input prices surged at their fastest rate in 29 months. The direct culprit? Rising import costs linked to the new tariff regime.

This trend presents a daunting challenge for the Federal Reserve. Higher prices typically call for interest rate hikes to contain inflation. But with economic growth slowing, the Fed may be forced to hold steady or even cut rates—a move complicated by the inflationary effect of protectionist trade policies.

PMI and Consumer Sentiment: Forward-Looking Indicators Turn South

PMIs, or purchasing manager indices, are forward-looking by design. They capture business sentiment and activity expectations. The April composite PMI for the US economy fell to its lowest level in 16 months. While manufacturing showed a slight improvement, service-sector activity deteriorated significantly. The optimism index—based on firms’ expectations for output in the next 12 months—fell to its lowest point since 2022.

S&P Global characterized the economic expansion as “modest,” projecting annualized growth of just 1.0%. This stagnation has been exacerbated by weak export demand, sluggish travel and tourism, and growing concerns about supply chain resilience. Manufacturing is hovering near stagnation, with any tariff-induced demand offset by deepening uncertainty and reduced foreign sales.

The consumer side of the equation isn’t faring much better. The University of Michigan’s final consumer sentiment index for April dropped to 52.2—a sharp 8.4% decline from March and a staggering 32.4% fall year-over-year. This marks the lowest reading since 2022 and the second lowest since 1981. Expectations about future conditions, in particular, fell off a cliff. That kind of psychological shift often precedes tangible changes in consumer behavior—especially if inflation expectations spiral out of control.

Indeed, consumer inflation expectations are now soaring. The anticipated inflation rate over the next 12 months jumped from 5% in March to 6.5% in April. For context, that figure was just 2.7% as recently as October 2024. At 6.5%, this is the highest level of expected inflation in over four decades. Consumers appear convinced that the new tariffs will spark a price surge.

Paradoxically, bond markets tell a different story. Breakeven inflation rates, derived from bond yields, have recently declined—likely reflecting mounting fears of a recession and a resulting cooling of inflationary pressure over the longer term.

Global Headwinds and the IMF’s Grim Forecast

The International Monetary Fund recently downgraded its forecast for global growth in light of what it calls a “historic shift” in US trade policy. The rise in America’s average tariff rate now rivals the infamous Smoot-Hawley tariffs of 1930—widely blamed for worsening the Great Depression. The IMF notes that these new trade barriers represent a significant negative shock to growth, made worse by their unpredictability.

In the IMF’s revised projections, global growth for 2025 has been reduced to 2.8% from 3.3%. For the US, the forecast now stands at 1.8%—down from 2.7%. Other major economies, including the UK, Japan, Canada, and China, also saw notable downward revisions. The IMF cited weakening consumption, soft export demand, and persistent policy uncertainty as the driving forces behind the adjustment.

Interestingly, the IMF believes the US dollar should be appreciating given the global slowdown. But in a twist, the greenback has actually weakened—possibly reflecting a growing perception that US assets are riskier in the face of escalating trade disputes and declining business confidence.

The Trade War with China: Escalation, Exemptions, and Strategic Moves

At the heart of today’s economic turbulence is the deepening trade conflict between the United States and China. While both governments continue to levy extraordinarily high tariffs on each other’s exports—some exceeding 145%—there are hints of pragmatism behind the scenes.

Treasury Secretary Bessent recently suggested that the US-China tariff standoff is not sustainable, hinting at a possible agreement “in the very near future.” While he cautioned that negotiations would be slow and difficult, he emphasized that “decoupling” is not the end goal.

In a sign of potential softening, both countries have begun carving out exceptions. The US has exempted certain automotive parts from the new tariffs to avoid damaging domestic automakers. China, in turn, has made select exemptions for aerospace components and is reportedly considering others for semiconductors, drugs, and medical devices—essential imports for its high-tech and healthcare sectors.

Still, the bulk of trade remains heavily restricted. Most US imports to China face a 125% tariff, and key American sectors like agriculture and energy are feeling the pain. On the other side, China’s rare earth exports—critical for many US technologies—have slowed dramatically, adding another layer of vulnerability to American supply chains.

It’s unclear which side holds the upper hand. China exports just 15% of its goods to the US, giving it some insulation. But American industries are deeply dependent on Chinese inputs—especially in sectors like medical devices and renewable energy, where alternatives are limited or nonexistent.

Where Do We Go From Here?

The US economy is not yet in recession, but the early signs of 2025 suggest it’s skating close to the edge. Trade policy uncertainty, inflationary pressure from tariffs, weakening consumer confidence, and slowing global demand have all converged into a headwind that even the strongest economic fundamentals may struggle to overcome.

If the US and China can de-escalate their trade war, a more stable environment could emerge. But in the meantime, businesses are holding back investment, consumers are pulling back on spending, and policymakers are caught between the twin threats of inflation and stagnation.

The coming months will be pivotal. Will the government recalibrate its trade stance? Can the Fed find a middle path between inflation control and growth support? And will global markets regain confidence in America’s economic trajectory?

Right now, the outlook is cloudy—and every major economic signal is flashing yellow.