President Trump's tariffs, widely promoted as a tool to enhance American manufacturing, are now proving to be a significant financial burden on businesses, causing strain on Morgan Stanley's chief economist believes corporate profits, labor markets, and prices are interconnected. In his Monday research note, US Economics Weekly, Michael Gapen presents a compelling conclusion: "Thus far, tariffs have functioned as a tax on capital."
During the second quarter of 2025, the United States Gapen’s team reported that corporations largely absorbed the increased cost of tariffs, counterbalancing higher non-labor expenses by cutting labor expenses. And financial gains, instead of transferring these advantages directly to customers. This starkly contrasts with the patterns seen in 2021 and 2022, a situation some term “greedflation”, during which companies reacted to increasing Profits were amplified by increasing prices beyond what was necessitated by rising costs.
Following his return to the office, President Trump has broadened "reciprocal tariffs" targeting key U.S. Partners in trade, amassing a record $25 billion in July, a threefold increase from the end of last year. The Committee for a Responsible Federal Budget (CRFB) projects tariffs will generate $1.3 trillion in additional revenue by the conclusion of Trump's present term, potentially reaching $2.8 tri By 2034, reaching approximately 1 trillion dollars. Fiscal 2025 is seeing tariffs contribute significantly, with their share of federal revenue doubling from its usual percentage. Tariffs currently make up 2.7% of the total, and forecasts suggest this could rise to 5%. % if current policies are maintained. Gapen's team has determined that this is currently operating as a capital tax.
The mystery of the 2025 economy
Gapen is grappling with a puzzle that has vexed numerous other economists: why the robust economy of 2025 doesn't *feel* that way, a phenomenon he refers to as The enigma of robust expenditure figures juxtaposed with lackluster job creation. His perspective is that this can be attributed to a corporate landscape that initially absorbed the expenses of Rather than increasing prices, CEOs have been privately complaining about this trend, which is driven by lower production expenses and a decrease in employee compensation costs. After months of deliberation, concluding that President Trump’s tariffs policy is unequivocally “bad for business.”
If Gapen's argument holds true, it would significantly illuminate the anemic hiring market for entry-level workers and the "job-hugging" phenomenon from the viewpoint of laborers, or "hoarding workers" as viewed by the company. As the stock market surges to numerous record highs fueled by AI enthusiasm, the core of the economy is grappling with significant challenges. Resulting from a significantly altered approach to trade. Federal Reserve Chair Jerome Powell describes the current economic situation as a "low-hire, low-fire" economy, and Gapen believes this is due to a massive, unacknowledged new corporate Levy introduced by President Trump. However, the economist also contends that it's improbable to operate as a tax in the long term.
Businesses squeezed, hiring cools
Current data indicates that companies are temporarily slowing down their hiring in response to the increased expenses caused by tariffs. Although surveys show that approximately two-thirds of companies impacted by tariffs haven'increased their prices, a significant number intend to do so, suggesting future price hikes. Inflationary forces in the near future. Reduced profits stem directly from higher per-unit nonlabor expenses, notably taxes on production and imports, such as tariffs. Nonfinancial sector expenses.
The covering of tariff expenses has fueled an intriguing economic split: robust consumer spending growth stands in stark opposition to a dist S a decrease in the pace of job increases. While stable consumer prices have preserved household spending power, the strain on the job market has become more apparent.
Although businesses have largely absorbed these expenses for consumers up to this point, the ongoing cost-passing mechanism poses a continuing risk to prices Further price hikes are anticipated, intensifying financial strain on families and enterprises alike. Scholarly research refutes the idea that U.S. Exporters are substantially absorbing Import prices from key trade allies such as the EU, UK, and Japan have remained stable or increased, indicating that tariffs have not been offset by price reductions. And the economies of Southeast Asian nations. However, the United States Businesses are experiencing the heaviest impact, and the actual tariff rate has sharply risen to 16% following recent escalations, leading to increased customs and excise deposits Treasury levels are escalating, reaching new highs.
Historical contrast and future risks
This year presents a significant departure from previous ones. During 2021 and 2022, facing supply chain issues and escalating production expenses, companies reacted by increasing prices while, counterintuitively, enhancing Financial success. However, the strategy has shifted; businesses are now controlling expenses internally, settling for reduced profits, and postponing price increases.
In the future, Morgan Stanley's analysts warn that if businesses cannot or will not shift more tariff expenses to customers, profit warnings, Enhanced cost management, and potential adjustments in stock markets could also occur. As the Federal Reserve observes a rising potential for negative outcomes in the labor market, this becomes a primary focus for them. Or, if unobserved productivity gains appear, perhaps due to efficiency enhancements and the integration of AI, profits might recover without a weakening Supporting consumer spending and robust labor markets.
Inflationary ripples loom
Survey results indicate that the impact of tariffs is still being fully felt. A poll conducted by the Federal Reserve Bank of Richmond indicated that approximately 25% of businesses impacted plan to increase their prices, while a further 40% to 50% have already implemented price hikes. The cost continues to climb. Over recent months, a noticeable increase in consumer prices has been observed for items subject to tariffs, with top analysts forecasting Core consumer price inflation, annualized, is projected to reach approximately 3.7% by the close of 2025.
On the ground, the impacts are backward. The Yale Budget Lab suggests that tariffs impose an annual burden of approximately $1,700 on families in the second-lowest income bracket, increasing to $8,100 for individuals in the highest income decile. To ensure your payment is processed smoothly, please submit all required documentation. This is a mandatory step for timely transaction completion. Defense analysts caution that escalating prices for essential hardware and parts may compromise U.S. Military preparedness, leading to increased expenses to maintain operational capability. According to the Council on Foreign Relations. and national defense requirements.
President Trump's tariff strategy, initially presented as a route to revitalize industry, is presently increasing non-labor expenses and reducing profit margins. For U.S. Companies. As the effective tariff rate approaches historic peaks, businesses are compelled to make difficult choices concerning their pricing strategies, workforce levels, and overall profitability. It remains to be seen if these pressures will ultimately ripple into the wider economy via increased consumer costs or continue to hinder business investment. Whether to hire remains to be determined. Fortune senior editor-at-large Shawn Tully along with Steve Hanke, the economist from Johns Hopkins renowned as “the money doctor” for his extensive international work Adventures in conquering hyperinflation, warned in August revealing that Trump's tariffs were essentially a hidden tax: "A massive nationwide sales tax that will cripple United States Economic expansion.
For this story, Fortune an initial draft was created with assistance from generative AI. An editor then confirmed the factual accuracy of the content prior to its publication.