Here’s when the economic data may start showing the tariff impact
00:00 Speaker A
You, of course, along with everybody else has been following the effects of tariffs here in the US and globally. Um, we know that there is a lag, uh, because of when and how the tariffs have been instituted. This is something that Chair Powell has been talking about. What’s your view on the question of when we will start to see it more and whether that effect is going to be sustained?
00:34 Seth Carpenter
Yeah, I know. It’s a key, key question here, and so we tried to do a bunch of work looking at what happened in 2018, for example, looking at everything we can scrounge from, uh, looking at changes in prices for supply chains. Looks like, uh, in a macro sense, it’s about three, four months after tariffs get implemented that you start to see it in the inflation data, and then it’s probably two, maybe three quarters until you start to see the effects of tariffs pushing down economic growth. If you remember back in 2018, uh, when President Trump was president before, tariffs on China were imposed the second half of 2018. We saw some disruption to manufacturing because two-thirds of what we import from China are either capital goods or intermediate goods that go into manufacturing in the US. So the tariffs are just taxes on US manufacturing. We saw manufacturing and industrial production start to fall in the second half of 2018 and keep falling for 2019. So where are we this time around? Well, we know that we just got some inflation data for the month of June, and it looks like the most of the tariff-sensitive categories started to show that pickup. So that’s kind of that three or four month lag that we had in mind. So we expect, uh, the inflation data to keep showing increases in tariff-sensitive, uh, categories for the next several months, really, uh, pushing up inflation for the third quarter quite notably. And then, you know, the fourth quarter, we’re probably going to see a big drag on the economy coming in from tariffs, augmented by the drag that the immigration restriction is doing. So we’re seeing everything play out in the data now as we had anticipated.
03:21 Speaker A
And so Seth, that implies that people on the street who were waiting for the Fed to cut rates, they might be disappointed for a while, not to mention the president himself.
03:42 Seth Carpenter
Yeah, I think that’s right. Our base case, once we had the announcement of tariffs coming in faster, bigger, sooner than we had originally thought, they all came in really aggressively in the beginning of the year, we changed our forecast. We said if that’s the way it’s going to work out, the Fed probably won’t cut rates at all this year in 2025. The logic being, and it’s very consistent with what, uh, Chair Powell said yesterday, inflation is still above target, and the labor market for now is just fine. And so there’s no reason for the Fed to cut in that circumstance. If inflation goes higher from here, well, that gives them all the more reason to stay where they are with policy slightly restrictive. And even if and when we start to see some degradation in the economy, some slowdown in the labor market, if inflation is still now high and rising at that point, the bar for them to cut rates has got to get worse, uh, as long as inflation is rising. So that’s how we get to the idea that they’re probably not going to cut rates this year. Uh, the market was in a very different place from us, uh, a month ago, two months ago, uh, judging from where things are now, the market’s putting a little bit less than even odds on a cut in September, reducing the expectation for cuts this year. Uh, so I’d say the market is coming to the same view that we have.
05:57 Speaker A
Um Seth, sort of looking at it as a case study, I know you’re looking at autos and auto pricing, which has not seen sort of the effect of tariffs. Um, so could you walk us through that just as an example to sort of illustrate how they you get these these lags and the effect?
06:33 Seth Carpenter
Absolutely. Now, the auto industry is very much the the exception that proves the rule in this case. Uh, it’s a industry very, very large, and yet dominated by a much smaller number of firms. And what we think we’re hearing anecdotally and possibly seeing in the data is that for now, some of the larger firms are are waiting. They’re absorbing some of the costs in their margin until they get a better sense of exactly where these tariffs are going to end up. There’s also a sense that they can wait and see if, you know, maybe they can take some market share, uh, because, um, you know, other other firms are facing higher costs. And if you can keep your prices down for a while and take some market share while the rest of the industry is is suffering, then that’s another possibility. So I do think the auto industry is about a bit of pain now in terms of absorbing the costs in the margin, that can’t last forever. And so we expect those prices and autos to start to come up in the next few months as well, maybe a bit more of a delay than the rest of the economy.