The Impact of Economic Policy Uncertainty on the Electrical Industry

The world is undergoing significant change this year, with new administrations across North and South America, Europe, and parts of Asia driving major geopolitical and economic shifts. The U.S. administration’s policy agenda, in particular, has been a source of much uncertainty and anxiety for both consumers and businesses in recent months.

To reshape the global economy, President Trump has embraced unilateral action on trade, with sweeping tariffs (or threats thereof) being enacted by executive order. This has led to a drop in consumer confidence and business optimism across the globe, both of which have dragged on the economy, slowing growth and making business planning even more difficult than it usually is.

The Economic Policy Uncertainty (EPU) Index aims to capture the level of uncertainty about government economic policies, including potential changes in regulations, taxes, and other developments that could affect the economy. As seen in Fig. 1, the EPU Index has been exceptionally volatile since the beginning of 2025, peaking in early April after the “Liberation Day” announcement of robust reciprocal tariffs for all of America’s trading partners. While volatility has persisted in the months since, a declining trend has also emerged, which is a positive sign for businesses in the electrical industry.

What do various political and economic developments such as tariffs, inflation, business optimism, and capital investment mean from the perspective of the electrical industry, and how do they affect the outlook for this unique segment of the economy? To answer this question, one must assess the topics individually in an objective, apolitical, and data-driven manner. The following sections aim to do exactly that.

The take on tariffs

Tariffs have been the largest source of uncertainty for businesses and consumers so far in 2025. Some clarity has now emerged on what trade deals with many of America’s largest trading partners will look like. Agreements, or frameworks of agreements, with the EU, UK, Japan, Korea, Vietnam, and others, plus the passage of the One Big Beautiful Bill Act tax policy roadmap, should alleviate some of the pressure on decision makers in the coming months.

However, tariffs on steel, aluminum, and copper (all critical material inputs for the electrical industry) are already driving meaningful impact on costs, pressuring margins in the electrical industry and many others. The effective tariff rate that importers pay to the U.S. government when importing products into the country will be substantially higher moving forward than it was in 2024 (see Fig. 2). Most estimates have the effective rate settling somewhere between 15% and 20%. As a result, upward inflationary pressure is expected to persist during the second half of 2025 and into 2026.

Confronting inflation challenges

Headline inflation (as measured by the Consumer Price Index) is already rising, having ticked up from 2.4% in May to 2.7% YOY in June, according to the latest data from the Bureau of Labor Statistics. The core reading, which strips out volatile food and energy prices, rose 2.9% over the past 12 months. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures Price Index, also ticked higher in June for the second straight month, rising to 2.6% above the year-ago level. Excluding food and energy, the PCE price index increased 2.8% from one year ago. Prices for durable goods (Fig. 3), comprising most electrical industry products, rose by the highest amount since January 2023, illustrating the upward momentum in prices felt by companies in the electrical sector.

Business optimism

According to an analysis from the Federal Reserve Bank of St. Louis, “the uncertainty shock that hit the U.S. economy in the first quarter of 2025 was historically large, even surpassing the shock associated with the COVID-19 pandemic.” This shock resulted in a significant decline in business optimism in the second quarter (see Fig. 4). Although it has recovered somewhat since the April low, as of July, the Small Business Optimism Index from the National Federation of Independent Business remains 6% below December 2024.

Capital spending

Core capital goods serve as a leading indicator of business investment. As seen in Fig. 5, these orders declined 0.7% in June, suggesting that companies may be pulling back on spending on equipment and infrastructure. The slowdown is a sign that firms are becoming more cautious with capital investment, in part due to ongoing uncertainty surrounding tariffs and broader trade policy. Rather than committing to new projects, businesses are taking a wait-and-see approach, delaying investment decisions until there is more clarity.

With factory orders showing signs of strain and investment indicators softening, the outlook for the electrical sector in the second half of the year remains uncertain. Unless trade tensions ease and cost pressures abate, capital spending is likely to remain under pressure in the second half of 2025.