The Labor Market Shows Strain from Rising Tariffs

Soaring tariffs are casting a long shadow over U.S. economic growth, and the latest jobs report is adding fuel to concerns about where the economy might be headed. All year, American businesses have been weathering heightened trade barriers, and the fresh labor market data now reveals weaker momentum than many economists anticipated. The Federal Reserve, long committed to threading the needle between restraining inflation and supporting jobs, is now under more pressure than ever to tip the scales toward supporting growth. 

The story starts at the ports and factory gates, where tariff rates are the highest they’ve been since 1909. The average effective U.S. tariff rate after all 2025 actions now sits at 22.5%. As a result, consumer prices have climbed an average of 2.3% in the short-run, and household costs have shot up by roughly $3,800 annually for the typical American family according to recent modeling. These higher prices, felt most acutely in goods like clothing, where apparel has jumped 17%, are more than just a line item on monthly budgets. They ripple into nearly every sector, dampening demand and ultimately leading to broader macroeconomic consequences. 

Real GDP growth, for instance, is being curtailed by nearly a full percentage point this year thanks to the broad sweep of tariffs and retaliatory measures. In dollar terms, that translates to the U.S. economy running about $160 billion smaller each year than would otherwise be the case. The impact isn’t distributed evenly across industries, either. While tariffs are meant to give manufacturing a leg up, that sector remains stagnant amid persistent supply chain uncertainty, while construction and agriculture are shrinking. These effects reverberate through to the labor market, with payroll employment already an estimated 505,000 jobs below what it would have been without this year’s crop of tariffs. 

This brings us to the latest jobs data, which landed as a disappointment and a warning. In August, employers added just 22,000 new positions, and the unemployment rate ticked up to 4.3%, the highest in almost four years. Even more troubling, after revisions, the June numbers now show a net loss of jobs, the first decline since the depths of the pandemic. Job growth is now running at a lethargic pace, averaging just 29,000 a month over the last quarter, with most of those gains coming from the healthcare sector. In the goods-producing parts of the economy, the story is even bleaker, as manufacturers and related businesses face month-after-month declines. 

The situation leaves the Federal Reserve on the hot seat. Just a few weeks ago, the central bank opted to maintain the target for the federal funds rate at 4.25% to 4.5%. The Fed, wary of both inflation and uncertainty from tariff policy, has preferred a cautious approach. That calculus, however, is changing quickly in the face of these softening labor reports and stagnant hiring. Market odds for a September rate cut have now soared to over 75%, with analysts widely expecting the Fed to step in before the end of the month to ease credit conditions and try to put a floor under growth. 

Ultimately, the persistence of these tariffs is reshaping the landscape for both households and businesses. With higher prices eating into purchasing power and job prospects becoming scarcer outside of healthcare, the promise of trade protection is ringing hollow for many sectors. The coming weeks will reveal whether Federal Reserve action can counteract these downtrends, but for now the message is clear: the costs of the tariff era are adding up quickly, and the labor market is feeling the strain.