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Thursday, Oct 02, 2025

America's economy is slowing. Ending the trade war could fix that

America's economy is slowing. Ending the trade war could fix that

Happy Sunday. A version of this story first appeared in CNN Business' Before the Bell newsletter. Not a subscriber? You can sign up right here.

The Federal Reserve doesn't have a magic wand to revive the slowing American economy. But President Donald Trump might.
New evidence emerged last week showing how tariffs and the vast uncertainty surrounding the US-China trade war are hurting the economy.

The manufacturing sector suffered its worst month since June 2009. Services, the larger portion of the modern economy, grew at its weakest pace in three years.

And although the unemployment rate tumbled to a 50-year low, a remarkable feat, private payroll growth continues to slow.
Taken together, the latest figures paint the picture of a slowing economy, but not one that's close to collapsing. Either way, growth could use a jump-start. While stocks rallied sharply late last week on hopes for a Federal Reserve rate cut, easy money alone won't solve the underlying problem: trade uncertainty.

"The economy needs a resolution to the trade war. The longer this persists, the greater damage it does to the US economy," said Kristina Hooper, chief global market strategist at Invesco.

The outlook for the economy is dimming. The New York Federal Reserve's GDP growth forecasting model was downgraded on Friday to 1.3% for the fourth quarter, compared with an earlier forecast of 1.8%.

The good news is that US and Chinese officials are scheduled to meet this week in Washington to try to make progress towards trade peace. Expectations are low for a breakthrough, although if one emerged it would immediately boost sagging business spending.

"We really need to have a rollback of the tariffs for there to be an improvement in CEO confidence," said Hooper.

Instead of getting rolled back, however, tariffs are currently scheduled to go up.

US tariffs on $250 billion of Chinese goods are set to rise on October 15, to 30% from 25%. And the Trump administration plans to impose 15% tariffs on December 15 on consumer-facing imports from China, including laptops, smartphones and certain footwear and apparel.

The on-again, off-again nature of the trade war has created confusion among business executives.

"It's not the tariffs themselves. It's the uncertainty about tariffs that is causing businesses to hesitate to make decisions," said David Kelly, chief global strategist at JPMorgan Funds. "Your entire business plan can be overturned by a tweet."


Factories cut jobs

Some economists argued that the very mixed September jobs report hints at damage from the US-China trade war. For just the second time since mid-2017, the manufacturing industry shed jobs last month. That makes sense because manufacturing is at the front lines of the trade war.

"The woes of the manufacturing sector are beginning to weigh on the broader economy," said Scott Clemons, chief investment strategist at Brown Brothers Harriman.

Bigger picture, total nonfarm payroll gains have slowed to 161,000 per month this year, compared with 223,000 in 2018. And wage growth decelerated in September.

"This is as good as it's likely to get until the trade war is resolved," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Shepherdson said the same leading indicators that predicted the hiring slowdown are now signaling that nonfarm payroll growth will decelerate to just 50,000 by the end of the year, from 304,000 in January. That means the unemployment rate would then begin to rise.

The hope is that trend will be reversed by progress on the trade front.

Expectations for a near-term resolution are low, however, especially after President Donald Trump vowed during last month's UN speech to address the "grave economic injustice" of unfair trading practices by China.

The last thing the already-slowing economy needs is a breakdown of the trade negotiations that leads to a rise in tensions and fresh rounds of tariffs.

"If there is an escalation, we could be headed for Brexit-level uncertainty," Invesco's Hooper said. "That would greatly increase the likelihood that the US goes into a recession."
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