Investing.com -- Despite a market rebound in early May, Wells Fargo analysts warned that the economic fallout from the U.S. trade war is far from over and may intensify in the coming quarters.
“The economy is not out of the woods yet,” Wells Fargo wrote, cautioning that the sharp trade-related drag that caused first-quarter GDP to contract “is just getting started.”
The bank cited a “bumpy ride for GDP growth” ahead, with particular weakness expected in the third quarter due to an “air pocket in consumer and business spending” following a rush to buy goods ahead of tariffs.
Real net exports subtracted 4.8 percentage points from first-quarter GDP, a drag “going back more than a half century,” according to the bank.
While businesses front-loaded imports to avoid higher costs, that surge may now give way to softer trade and inventory dynamics.
“Even if tariffs are rolled back significantly in the weeks or months ahead,” analysts warned, “businesses won’t need to source as much product as they unwind inventory.”
Wells Fargo expects the Federal Reserve to respond by cutting rates, forecasting the fed funds rate to fall to 3.50% in the second half of the year.
However, they noted a key difference from past cycles: “Inflation is apt to be rising rather than coming down,” due to tariff-related price pressures.
The Fed, they believe, will “look through the price level increase caused by tariffs,” so long as inflation expectations remain stable.
The bank underscored the uncertainty ahead: “The tariffs do inject pronounced uncertainty into the outlook,” with the path forward requiring successful trade deals, a controlled labor market slowdown, and sustained consumer spending.
“It will be difficult to stick the landing,” Wells Fargo said.