Tariffs, policy shifts cloud economic outlook, Barkin says

“‘It’s complicated’ might be the tagline for today’s talk,” Richmond Federal Reserve President and CEO Tom Barkin said Tuesday at the Big Dipper Innovation Summit in Richmond.

The U.S. economy is healthy according to current data, but uncertainty about federal policy changes like tariff rates makes predictions difficult, Barkin said during a session titled, “A Conversation with Tom Barkin: Macro and Micro Economic Forcers Shaping Our Future.”

“What you’re seeing is an economy that by data is in good shape,” Barkin said, “but the conversation we’re all having is about policy changes and where they may go and how do they affect the economy.”

In terms of data, the unemployment rate is 4.15%, which is historically low, noted Barkin. Last year, the nation’s gross domestic product grew 2.5% (according to the U.S. Commerce Department). While GDP growth is likely to be “flattish” in the first quarter of 2025, that’s likely due to firms frontrunning tariffs and bad weather.

Although uncertainty obscures what could come like a fog obscures roads for motorists, “there’s not a lot of uncertainty about the direction of these policies,” Barkin said. “We know they’re going to be more tariffs. We know there’s going to be deregulation. We’re pretty sure there’ll be a tax bill. We know traditional energy is being supported. We know there are constraints being made on immigration. We know government spending is going to be cut. … So, we know the direction, but what people aren’t as clear about is the destination.”

As for whether the U.S. is headed for a recession, Barkin said no day-to-day data, such as initial unemployment claims, the unemployment rate and consumer spending, suggest the country is currently in a recession, but it’s hard to predict, especially since the causes of recent recessions have been unexpected.

“People do worry a lot about recession, but it’s been a long time since we’ve had one that came from natural forces,” he said. “They generally come from something that comes in, winging in from left field. So you can’t ever discount a recession. It’s always out there potentially.”

“I don’t think telling you ‘when something wings in from left field’ is much of a forecast,” he added later in the event. “Another way to put it is that economic forecasting was invented to make weather forecasting look good.”

Amid uncertainty, businesses are currently being defensive but not recessionary, Barkin said. One example of that is businesses instituting hiring freezes but not firing people, contributing to a “low hiring, low firing” labor market.

On the consumer side, “I think there’s lots of reasons to be worried about consumer spending,” including that consumer spending has dropped significantly over the last few months and that consumers are more worried about inflation and worried about losing their jobs, he said.

“But consumer spending is pretty resilient, and right now, consumers have jobs, unemployment’s low, and real wages are still going up, and so consumers have money to spend. Whether that lasts or not, is what we’re going to have to see.”

One worry with tariffs is that many companies might try to pass higher costs through to consumers, which could lead to less demand, which in turn generally means businesses need to lower costs. Meanwhile, if companies don’t pass through costs, lower prices lead to lower margins, which also means lowering costs.

“That’s the risk, is that if these things are not met with consumer demand, then you’re going to have to do something on the cost side, and that’s what would lead to layoffs.”

Economic concerns across Virginia

In Northern Virginia, government contractors are concerned about government spending, and federal workforce reductions are affecting the regional economy.

“Obviously the D.C. metro economy has gone south, and so retail spending numbers in [the] D.C. metro are significantly down,” as people losing their jobs or worried about losing their jobs pull back,” Barkin told reporters after the event.

A lot of farmers he’s spoken with in the Federal Reserve’s Fifth District are concerned about retaliatory tariffs, Barkin said during the event.

“A huge part of the world’s food supply is actually produced here,” he said. “That would include soybeans and corn, but also pigs and chickens. We export an awful lot of agriculture to China [and] to Europe, and there’s some concerns, if they put tariffs on us and retaliate, that that would take away markets and lower prices.”

More specifically to Virginia, Barkin said afterward, he’s heard from peanut businesses that their biggest markets are China, Mexico, Canada, Europe and Japan.

How manufacturers will be affected depends on sector, Barkin said. He spoke to a business owner in his region, for example, whose business premise is onshore manufacturing of pharmaceuticals, putting him in a healthy position.

Other sectors in the U.S. that have been challenged by overseas competition feel tariffs might support them. Steel manufacturing is one example.

“Of course,” Barkin said, “if you’ve put most of your manufacturing base in China, you’re very challenged by that. If you’re a retailer who’s highly dependent on products coming from China, you’re very challenged by that. But it all depends on where you sit.”

In response to an audience question about onshoring, Barkin said, “When I talk to manufacturers, they have a hard time conceiving of moving lower-end manufacturing onshore. … But they can see moving highly technological manufacturing onshore, because we do have the technical talent here, and it’s more capital and less labor, so I think that’s likely to be the places where onshoring would start.”

Additionally, a lot of the factory machinery is manufactured in Germany, Switzerland, Italy and China, and would need to be brought in for technologically intensive manufacturing, Barkin said, “so again, it’s complicated.”