Introduction to Tariffs
Executives at America’s leading companies and Wall Street analysts are still discussing tariffs extensively. Although mentions of "recession" have dropped significantly, references to tariffs remain extremely high compared to historical data. This suggests that while the fear of recession has decreased, the impact of tariffs is still a major concern.
The Shift in Perception
A survey by the Conference Board found that the share of respondents expecting a US recession in the next 12 to 18 months decreased to 36% in Q3, down from 83% in Q2. Similarly, a survey by Bank of America showed that the percentage of fund managers who consider a trade war triggering a global recession as the biggest tail risk decreased from 80% in April to 29% in August. Despite expectations of rising US tariff rates, the concern about tariffs causing a recession has diminished.
Tariffs: A Manageable Risk
Tariffs are now seen as a "known known" and a manageable risk by corporate America and market participants. The July CPI inflation report showed a gentle pickup in core inflation, which was treated as a threat to real growth that the Federal Reserve will offset by lowering interest rates. This demonstrates that tariffs are not currently a dominant feature of the economic backdrop.
Winners and Losers
While some companies, such as 3M, have been able to adapt to tariffs and adjust their guidance accordingly, others, like Under Armour, are still struggling under the weight of tariffs. The fingerprints of tariffs are all over many relative price changes and specific pockets of price pressures. However, tariffs are not yet playing a starring role in defining the average American’s inflation experience.
Inflation and Tariffs
The inflation story is unfolding slowly, which may mean that tariff pass-through is delayed or will ultimately be less than expected. Corporate America’s ability to adapt is another factor preventing tariffs from creating a large hole in activity or the stock market. While employment growth has slowed, and sectors like manufacturing are not being helped by trade barriers, the unemployment rate remains at 4.2%, the same level as a year ago.
The Future of Tariffs
As more post-tariff imported inventory goes on the shelves, companies may look to push prices higher to protect margins. Consumers may not be able to grapple with higher prices, which could impact consumer spending. However, there is also the potential that the fear around tariffs was worse than the experience of actually living with them. Recent data shows that consumer spending per household rose by 0.6% month-over-month in July, which supports the view that the consumer could be gaining steam.
Conclusion
In conclusion, while tariffs are still a major concern, they are no longer seen as a surefire bet for recession. Corporate America and market participants have adapted to the new reality, and the impact of tariffs is being managed. However, the future remains uncertain, and the question remains: are tariffs a "boiling frog" process, or is the water just lukewarm? Only time will tell as the data and corporate updates unfold over the coming months.
