Economic Impact of Tariffs
The recent increase in tariffs in the U.S. is expected to have a significant impact on the economy. With tariffs already elevated over the past several months, maintaining them at these rates will likely lead to higher goods inflation and softer consumption in the months ahead. This means that prices for goods may rise, and demand for certain products may fall.
Effect on Corporations and Consumers
Corporations that had built inventories ahead of tariffs will likely start to work these down and need to replenish at higher rates. Additionally, companies and supply-chain partners that had been willing to absorb some of the tariff costs through lower profit margins may not be as willing to do so indefinitely. As a result, goods prices are likely to rise, and demand may fall in certain categories. Discretionary spending overall may also come down as consumers feel the pinch of higher prices.
Inflation and the Economy
However, it’s worth noting that the tariff impact should be a one-time shift higher in prices, and then the impact on inflation may stabilize. The U.S. Consumer Price Index (CPI) inflation basket is largely based on services, not goods, with services making up about 64% of the basket and goods making up about 36%. In Canada, services make up about 57% of the CPI basket. This means that while tariffs may push up goods inflation, if services inflation continues to show signs of moderation, the overall inflation impact may be more modest.
The State of the Job Market
Weakening Labor Market
The latest jobs data appears to be a meaningful downshift, especially for the U.S. economic narrative. Prior to the recent jobs report, the narrative was that inflation was ticking higher but seemed contained, and the U.S. labor market looked resilient. However, the July jobs report highlights that the U.S. labor market has been weaker than the data had indicated.
Job Numbers and Unemployment Rate
The July jobs report indicated a total of 73,000 new jobs were added, well below estimates of 104,000. Perhaps most importantly, the last two months of data were revised sharply lower, subtracting about 260,000 jobs from the totals. This brings the average job gains of the last three months to 35,000, well below the 127,000 average of the prior three months. The unemployment rate ticked higher from 4.1% to 4.2%, still well below historical averages, although labor-force participation dropped to 62.2%, the lowest since November 2022.
Canadian Job Market
Similarly, in Canada, the unemployment rate is hovering around 6.9%, above its recent lows, and the Canadian labor-force participation rate is now around 65.4%, below pre-pandemic levels.
Conclusion
In conclusion, the recent increase in tariffs is expected to have a significant impact on the economy, leading to higher goods inflation and softer consumption. The job market is also showing signs of weakening, with lower-than-expected job numbers and a higher unemployment rate. While the impact of tariffs on inflation may be modest due to the large services component of the CPI basket, the weakening labor market is a concern. As the economy continues to evolve, it’s essential to monitor these trends and their impact on the overall economy.
