Northwestern Mutual: Tariffs Leave U.S. Economy in ‘Uncharted Territory’

Markets ended last week higher, but growing signs of tariff-related inflation risks are clouding the outlook, according to Northwestern Mutual Wealth Management Company.

Brent Schutte, chief investment officer, noted that “core inflation, which excludes volatile food and energy costs, rose at the fastest annual pace in five months.”

He pointed to Bureau of Labor Statistics data showing goods inflation at 0.2 percent and services inflation at 0.36 percent, raising concerns that inflation may be seeping into the broader economy.

Wholesale price pressures were also evident, with the Producer Price Index jumping 0.9 percent in July, the largest monthly gain in three years. Schutte said the increase was driven by higher costs in both services, up 1.1 percent, and goods, up 0.7 percent, raising the question of whether companies will eventually pass those costs to consumers.

Attention now turns to the Federal Reserve’s September policy meeting. Markets initially priced in a near-certain chance of a 0.25 percent rate cut after weaker jobs data, but expectations slipped following the hotter-than-expected PPI report.

Schutte cautioned that “it is too early to assume that the Fed will cut interest rates and counteract tariff-related headwinds.”

“Much will depend on the August jobs report and whether the recent slowing in the labor market continues or worsens. If that trend persists, rate cuts are more likely.”

Consumer sentiment also softened in August, with households anticipating higher unemployment and faster inflation. Meanwhile, small businesses continued to report sluggish sales despite showing optimism about policy support.

Schutte warned that “with regard to tariffs, we are in uncharted territory.” He highlighted research suggesting average tariff rates could reach 18.6 percent if all announced measures are enacted, the highest since 1933.

“We believe this creates uncertainty in forecasting potential outcomes and continues to point to a diversified portfolio focused on the long term as the best path forward,” concluded Schutte.