Trade shocks, employment and the coming recession

PERSPECTIVE | June 03, 2025

Authored by RSM US LLP

The recession will start on the docks of Los Angeles.

It will be a product of a rational response of producers, wholesalers and retailers to the uncertainty created by policymakers.

The cost of those policy decisions is a misapplied consumption tax on households and businesses, which will soon cause a premature and unnecessary end to the expansion. Rising inflation, declining real incomes and increasing unemployment will follow.

The price of those policies will first be paid at the ports and then spread to the rest of the economy.

Eugene Seroka, executive director of the Port of Los Angeles, correctly anticipated a 35% drop in inbound shipping containers.

The average cost of that inbound merchandise will roughly double, which will soon translate to rising prices.

This situation has all the markings of yet another trade shock, resulting in a loss of employment and household income that will push the U.S. economy into recession.

This view is based on the fact that 7% of U.S. employment involves transportation and the moving of materials, while roughly another 15% involves occupations ranging from warehousing to the wholesale and retail trades.

For this reason, the number of import containers processed at the seaports of Los Angeles and Long Beach has become a leading indicator of U.S. economic activity and growth.

The ports of Los Angeles and Long Beach are the predominant destinations for goods from South Asia. Seroka states that 45% of import containers processed at the Port of Los Angeles originate in China.

That data suggests a direct connection between the 145% tariffs imposed on China’s goods and the cancellation of 17 of the 80 ships that had been scheduled to arrive in Los Angeles in May.

The connecting line then continues, explaining the immediate drop in the earnings of dockworkers, truckers and warehouse employees, with negative ripple effects on local businesses serving Los Angeles.

Beyond Los Angeles, the loss goods will increase prices for the remaining inventory, while tariffs will impose a tax on incoming supplies of essential items ranging from food to iPhones.

During the past seven years, global supply chains have experienced three major disruptions. They provide a clue as to what we might expect, starting with the Southern California seaports.

• The 2018 trade war: The brief U.S. trade war with China, Canada and Mexico in 2018 led to a 35% plunge in container shipments at Los Angeles and Long Beach. The drop in imports was followed by a drop in agricultural exports and the permanent loss of market share for American farmers.
• The 2020 pandemic: The immediate effect of the shutdown in economic activity was a 37% drop in containers processed at Los Angeles and Long Beach.
• China’s 2022 zero-COVID policy: The lingering effects of China’s “zero-COVID” policy closed down the Shanghai port throughout 2022. That closure was followed by the war in Ukraine and the inflation shock, all leading to a 45% drop in import containers at the Southern California ports.

Today’s tariff shock comes on the heels of those previous episodes. It will be the second time in recent years that government intervention will upset the market-driven, global free trade system that the U.S. and its allies had developed over the past 75 years.

In 2018, the trade war led to a global manufacturing recession that permanently damaged suppliers along the supply chain.

Germany and Italy, both industrial powerhouses, lost their export market share, leaving China as the last nation standing. And now Japan, once the leader of manufacturing innovation and just getting back on its feet, has cut its growth forecast because of U.S. tariffs.

Tariffs and the damage done

One immediate cost of the trade policy has been the loss of confidence in the American economy, as evidenced in the flight of capital away from traditional safe havens like the U.S. dollar and Treasury notes as American equities have come under pressure.

Now, some of the United States’ most important trading partners are seeking alternatives. The governments of Japan and South Korea, for example, have opened trade talks with China.

Closer to home, the U.S. government has attacked an important source of its prosperity: the North American free trade zone.

Then there is the question of whether low-skill, low-value-added manufacturing would return to the U.S.

The U.S. economy no longer has a labor force that will accept low-wage occupations. The workers who are the most willing to perform those jobs—immigrants—are being restricted.

In the short run, we anticipate an increase in unemployment first among occupations along the U.S. supply chain. That will be closely followed by an increase in prices caused by a shortage of goods after inventories are exhausted.

Demand will then drop, leading to the return of stagflation, for the first time in more than 40 years.

Here’s how a nation gets dragged into recession during a trade shock.

1. Dockworkers take the first hit ...

In the past, trade disruptions and a drop in import containers processed at the Southern California seaports sparked declining employment in occupations related to transportation and material moving. This is reflected in data collected by the monthly survey of households conducted by the U.S. Bureau of Labor Statistics.

According to Seroka, the Port of Los Angeles executive director, dockworkers take the first hit, with their paychecks initially shrinking due to the loss of overtime and then from diminished regular hours.

That is followed shortly by reductions in the number of truckloads of containers leaving the seaport.

2. Then the broader trucking sector declines ...

The Truckstop Market Demand Index reflects the ratio of bookings to available equipment. The ratio would be expected to rise during periods of excess demand and decrease during slow periods.

The index increased substantially in March and then declined in April, which corresponds to the increase and then the flattening in inventory accumulation in the run-up to the tariffs.

The growth rate of U.S. trucking occupations accelerates during periods of increased import container volumes and decelerates in the aftermath of trade dislocations.

Truckers rely on a circuit of everything from big to small businesses. After a surge in demand for trucking in the first months of the year, the number of bookings dropped in April. That implies a loss of revenue for truckers and for the businesses that service trucking.

3. Followed by the railroads ...

Containers destined for hubs across the country are likely to leave the West Coast by rail. In the past, after each trade shock, railcars loaded with containers, known as intermodal transportation, have dropped in absolute numbers and in percentage terms compared to the previous year.

In this latest episode, intermodal carloads have been in decline since the start of the year, which can be attributed to the rational response of wholesalers and retailers to the potential of an economy heading into recession.

4. And finally, the warehouses

Whether goods travel by truck or by rail, the next stop along the supply chain is most likely a warehouse. Again, we saw a drop in demand for warehouse employees after each of the trade shocks since 2019.

This pattern is visible in the monthly data collected from BLS surveys of establishments, rather than from surveys of households. The number of employees has been flat since last year’s election, perhaps reflecting another rational decision in the face of policy uncertainty.

Price distortions

A trade disruption is expected to cause price distortions. While increases in top-line inflation will be partially mitigated by falling oil prices, rising prices will first be observed along the dense and complex supply chains in the U.S. and around the world.

Shipping: The cost of shipping a standard container from Shanghai to Los Angeles had fallen to $2,590 as of the first week in May. That is 46% lower than in January and 52% lower than a year ago. We attribute the price reduction to the drop in demand by wholesalers and retailers reluctant to be stuck with inventories if U.S. consumer demand cools as prices increase and if the economy were to slip into recession.

Prices paid: There is already evidence that retail prices will increase as the trade war continues. The latest survey of purchasing managers indicates a sharp increase in prices paid for intermediate goods, which will evolve into higher prices for consumers even if wholesalers and retailers maintain current margins.

The takeaway

Cutting off the U.S. economy from the rest of the world without a plan to replace goods will result in shortages, higher prices and higher unemployment.

Businesses have responded rationally by first pulling activity forward into the first quarter and now pulling back on purchases.

The damage has been done, and a large decline in shipping volume into the Port of Los Angeles is inevitable.

Further disruptions to U.S. supply chains through trade policy will mark the end of the current business cycle as the economy slips into recession.