CNN
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Despite widespread concerns that the trade war is dragging down America’s economy, President Donald Trump has notched quite a few wins on his economic belt in recent weeks.
Inflation keeps falling. Jobs remain plentiful. And there’s growing evidence the economy could be booming this quarter.
That’s why Trump’s increasingly hostile rhetoric about China over the past week was particularly concerning ahead of his call Thursday with Chinese leader Xi Jinping. Trump’s economy is cookin’ – for now. But the economic Jenga tower the Trump administration has constructed is precariously balanced on a host of economic caveats and unproven theories. Renewed trade tensions with the world’s second-largest economy threatens to knock the tower to the ground.
May 12 represented a major turning point for the global trade war. Delegates from China and the United States announced they would significantly roll back their historically high tariffs on one another. Markets were elated. Wall Street banks curtailed their recession forecasts. And moribund consumer confidence rebounded significantly.
That’s a significant change from April, when tensions ran so high that trade between the United States and China came to an effective halt. The 145% tariffs on most Chinese imported goods made the math impossible for American businesses to buy virtually anything from China, America’s second-largest trading partner.
No one wants to return to that. Treasury Secretary Scott Bessent, America’s chief negotiator in the détente with China, said previous tariff levels were “unsustainable.” That’s why he said the countries put in place mechanisms to prevent a re-escalation.
But Trump and his administration in recent weeks have grown increasingly hostile toward China, accusing the country of breaking the promises it made in mid-May. China has similarly said the United States has failed to live up to its obligations under the agreement.
Trump and Xi held a long-awaited phone call Thursday, a person familiar with the matter said. The White House did not immediately confirm the call, which was also reported by Chinese state media.
If the call fails to result in another de-escalation, tensions could boil over, and tariffs could rise again. So could recession forecasts. And the good vibes that have powered a rebound in sentiment and a massive market rally could disappear in a flash.
Although virtually no economic reports are entirely good or bad, and with the obvious caveat that monthly economic data are inherently backward looking, US data have been surprisingly resilient lately.
So resilient, in fact, that Trump’s top economic advisors have made a point of highlighting the widespread predictions of soaring inflation and large-scale job cuts that drove headlines throughout April.
“Everything has been alarmist,” Treasury Secretary Scott Bessent said Sunday on CBS’ Face the Nation. “The inflation numbers are the best in four years, so why don’t we stop saying this could happen and wait and see what does happen.”
Annual consumer prices grew just 2.3% in April, according to the Consumer Price Index, and inflation that month fell to 2.1%, according to the separate Personal Consumption Expenditures price index. The PCE report is particularly noteworthy, because the Federal Reserve favors that report when it considers whether to change interest rates. Over time, the Fed targets 2% inflation, so America is, at long last, nearing that long-term target after a yearslong bout with historic price hikes.
Trump, citing America’s low inflation rate, has been bullying Federal Reserve Chair Jerome Powell to cut interest rates to boost the economy – even summoning Powell to the White House last week to give him a talking to.
As Powell has noted, economic data is looking strong. Jobs data, although weakening, has steadied in recent months. The unemployment rate is hovering at just over 4%, and employers have added a solid number of jobs each month. The number of available jobs in America unexpectedly increased in April, a potential indicator that the labor market remains robust.
And a positive effect of trade tensions could at least temporarily benefit America’s economy. Gross domestic product, the broadest measure of the economy, shifted into reverse in the first quarter as businesses stockpiled goods in anticipation of tariffs. This quarter, imports from foreign countries – particularly China – have fallen dramatically. In April, the US trade deficit shrank by its steepest monthly pace on records, which go back to 1992. That should give America a big, albeit momentary, boost.
The Atlanta Fed’s GDPNow tool currently predicts the US economy will grow at an adjusted annualized rate of 4.6% this quarter, a huge number that would more than make up for the -0.2% rate in the first quarter.
But Trump’s ramping up of restrictions and public scrutiny of China risks putting sugar in the gas tank just as the engine started humming again.
Trump on Wednesday said in a Truth Social post that Chinese leader Xi Jinping was “extremely hard to make a deal with.” Trade talks have stalled, Bessent said, apparently frustrating Trump.
Last week, Trump posted on social media that China “TOTALLY VIOLATED ITS AGREEMENT WITH US.” Trump said that he made a “fast deal” with China to “save them from what I thought was going to be a very bad situation.” He added: “So much for being Mr. NICE GUY!”
The Trump administration had expected China to lift restrictions on rare earth materials that are critical components for a wide range of electronics, but China has so far refused, causing intense displeasure inside the Trump administration and prompting a recent series of measures to be imposed on the country three administration officials told CNN last week.
For example, the White House warned US companies against using AI chips made by China’s national tech champion Huawei. It stopped US companies from selling to China software that is used to design semiconductors. And the US State Department announced it would “aggressively revoke visas” for some Chinese students in America.
China, in turn, has accused the United States of “provoking new economic and trade frictions.”
“The United States has been unilaterally provoking new economic and trade frictions, exacerbating the uncertainty and instability of bilateral economic and trade relations,” the Chinese Commerce Ministry said Sunday.
Meanwhile, it’s not like tariffs have completely evaporated. Trump’s levies still make up the highest effective US tariff rate in nearly a century.
The United States maintains a 10% universal tariff on most goods coming into the country, and Trump just doubled tariffs on steel and aluminum this week. He has threatened higher tariffs on dozens of countries that are unable to reach trade deals with the administration over the course of the next month. And China and the United States, despite their de-escalation last month, maintain significant, double-digit tariffs on one another.
Economists, Wall Street analysts, business leaders and consumers continue to sound the alarm bell about the trade war, worrying about a toxic combination of rising prices and slowing economic growth.
The reality remains the universal exhale across Wall Street and C-Suites after the US-China de-escalation didn’t change the fact that signs of a sharp economic downward turn had been pervasive in what economists call “soft data” for months.
In survey after survey capturing business, manufacturing and consumer sentiment, the vibes have remained tangibly anxious even if they’ve slowed the rapid downward trend.
Powell captured that split screen effect best during a May press conference defined by just how many times – and different ways – he could explain Fed officials simply didn’t know what would happen next.
“People are worried about inflation, about a shock from tariffs,” Powell told reporters. “But that shock hasn’t hit yet.”
Surveys data doesn’t necessarily serve as leading indicators for the hard economic data to come, and were shown to be particularly divergent over the course of the last five years. Trump’s ability to flip a switch and ease the all-consuming pressure on the global economy, at least somewhat, is probably the most blunt and effective tool in modern history to reverse any sentiment doom spiral.
But some underlying data is raising concerns.
A government report this week showed layoffs in April leapt higher by nearly 200,000 to 1.786 million, reversing a similarly sized drop seen in March. Initial unemployment claims rose to 247,000 last week, far more than estimated. And outplacement firm Challenger, Gray & Christmas reported Thursday that American employers announced 94,000 layoffs in May – down 12% from April but up 47% from last year. Layoff announcements have spiked 80% this year.
Last week, a key economic report showed consumer spending rose just 0.2% in April, a weaker-than-anticipated reading and a significant retreat from March.
And some consumer and business survey data remain incredibly weak. Consumer sentiment remained near historic lows reached in March despite recent trade deal announcements, according to the University of Michigan. And the Fed’s beige book, a collection of business leaders’ reactions to the economic environment, showed that companies across industries are remaining deeply uncertain about the economy – particularly because of the trade war.
That sentiment, if it remains static and pairs with the pervasive and paralyzing corporate uncertainty, can start to bleed into the underlying data. There have been warning signs of that occurring of late.
“I would say surprisingly little direct impact so far in the data that’s coming out,” Federal Reserve Bank of Chicago President Austin Goolsbee said this week. “We don’t know if that will remain true for the next month or two.”
So good news could ultimately turn bad, even without escalating tensions with China. But a return to tit-for-tat tariffs and closed borders could make matters significantly worse.
