Quarterly economic outlook: The world just keeps truckin’ on.

Von Alst: Hello, I'm Kat Von Alst, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager, Jim Solloway, who will be presenting our economic outlook as of the third quarter of 2025. 

Tariffs continue to dominate the headlines. Although some trade agreements have been reached with various countries, President Trump continues to implement additional duties on specific industries, which could elicit retaliatory actions from major U.S trade partners. We saw new investigations that would impose tariffs on specific sectors such as industrial machinery, robotics, and medical devices. One of the newest developments in the tariff saga is the Supreme Court's examination on the constitutionality of President Trump's so-called reciprocal tariffs. 

Jim, the legal landscape is complex. Can you give us any clarity about what to expect depending on the outcome of the Supreme Court's review?

Solloway: Thanks, Kat. What we can safely say is that tariffs are here to stay and the uncertainty is not quite over. The Supreme Court needs to decide whether to uphold the ruling of two lower courts that the tariffs imposed under the International Emergency Economic Powers Act--or IE but for short--are unconstitutional. Given that the Supreme Court will take the case immediately, we may see a decision before year end. 

The chart on the screen underscores the dramatic change in tariff rates that could result from the end of the IEEPA tariffs as calculated by the Yale Budget Lab. The current effective rate is north of 16%. Without the IEEPA tariffs, the effective rate falls to 7%. If the IEEPA tariffs are judged to be unconstitutional, we think it will create some disruption, both good and bad, for markets and business activity. but it shouldn't be as unnerving as the impact from April's Liberation Day. All exporting countries to the US will cheer this development to a greater or lesser extent. Multinational companies and domestic businesses heavily dependent on foreign made parts would enjoy a major windfall. It would cut the cost of inputs that go into the production process and put downward pressure on goods inflation. 

Any tariff relief, though, may prove fleeting. In last quarter's economic outlook report, we noted that the administration has other tools at its disposal to reimpose tariffs near the overall levels that are currently in place.

Von Alst: The president has regularly touted tariff revenue. Can we see yet if that has any measurable positive impact for the US economy?

Solloway: Custom duties have become an important revenue source for the US government. They have soared since April, with net receipts in the month of August reaching $29.5 billion. That amounts to about 10% of the value of goods imported. Since the effective tariff rate based on current policy is substantially higher, the revenue stream should increase even further. We figure the tariffs collected could eventually exceed 1% of GDP.

A Supreme Court ruling against reciprocal tariffs would temporarily blow a big hole in the administration's budget calculations, which would make the government deficit picture worse. The chart on the screen illustrates how the US government has been running a chronic deficit for decades. Spending represented by the blue line consistently outpaces revenues represented by the black line. Spending continues to hold above 23% of GDP versus its long term average of 18.7%.Revenues, meanwhile, have managed to stay close to long term average of 16.8%. If a recession were to materialize, revenues would almost surely decline as a proportion of GDP while spending increases. A deficit approaching 10% of GDP is not out of the question in a recession of moderate severity.

Von Alst: The US Federal Reserve recognized the risk of higher unemployment when it lowered interest rates by 1/4 of a percentage point in September. The central bank appears to be starting a prolonged rate cutting phase, joining the ECB, the Bank of Canada and the Bank of England. While short term interest rates among the most developed countries have come down significantly in the last 12 months, longer term yields have gone in the opposite direction. Jim, what does this say about that global economic backdrop as we enter the final months of 2025?

Solloway: Although growth and inflation expectations vary across major developed economies, long term fiscal stability is a concern for several countries. The chart on the screen illustrates the yield curve of several developed nations. The United Kingdom's sovereign bonds are very high across the entire curve, followed by the United States, Italy, and France. The increases in yields are especially pronounced the further one goes out on the curve, reflecting investors expectations regarding inflation, growth, and the long term fiscal stability of each country. Several structural factors continue to drive government debt upwards. A further steepening of countries yield curve seem likely as central banks cut their policy rates, but longer term yields remain elevated as governments maintain a high level of debt issuance.

Von Alst: Thanks Jim, we always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook, available on our website.