Tariff Impacts: Prices, Margins and Fed Challenges
Aristotle Pacific’s Jeff Klingelhofer, CFA, breaks down the implications of the latest tariff developments on the economy.
Tariff Impacts: Prices, Margins and Fed Challenges
Aristotle Pacific’s Jeff Klingelhofer, CFA, breaks down the implications of the latest tariff developments on the economy.
Contents
In seeking to understand the root challenges facing markets today, I find it helpful to frame facts, assertions and unknowns from a 10,000-footview.
First, the facts: Over the past several decades, we have seen a significant outsourcing of manufacturing to lower-cost countries.
Next, the assertions: This drop in manufacturing coincides with falling inflation, a declining labor share in GDP, rising corporate margins and growing disparity of incomes. I leave debate over correlation vs. causation to others.
Finally, the unknowns: To what degree have we overshot on outsourcing? Where will tariff rates end up? How will the intersection of sociology and economics resolve on the battlefield that is global politics?
Where are we headed? In our opinion, tariffs are likely to stay higher than they were in previous years, and some manufacturing may return to the U.S. A higher input cost of U.S. labor may result in higher prices, though they could be partially offset by rising productivity. Unfortunately for the markets, it may also likely translate to falling margins and demand. The devil is in the details and relative proportions, but it’s hard to argue we’re headed down an entirely different path.
It appears the intersection of rising prices and falling demand will present a challenge to the Federal Reserve’s mandate. In the face of increasing inflation, we think it’s important for the Fed to resist the temptation to act preemptively in cutting rates and instead revert to its reactionary playbook. Politics can (and does) change on a whim, and markets hate that uncertainty. For those of us looking for answers, we would be well advised to remind ourselves that little in life is certain. The best we can do is to think outside of the world we know today and envision what may lie ahead. The direction of travel is clear even if the exact destination remains uncertain.
In seeking to understand the root challenges facing markets today, I find it helpful to frame facts, assertions and unknowns from a 10,000-footview.
First, the facts: Over the past several decades, we have seen a significant outsourcing of manufacturing to lower-cost countries.
Next, the assertions: This drop in manufacturing coincides with falling inflation, a declining labor share in GDP, rising corporate margins and growing disparity of incomes. I leave debate over correlation vs. causation to others.
Finally, the unknowns: To what degree have we overshot on outsourcing? Where will tariff rates end up? How will the intersection of sociology and economics resolve on the battlefield that is global politics?
Where are we headed? In our opinion, tariffs are likely to stay higher than they were in previous years, and some manufacturing may return to the U.S. A higher input cost of U.S. labor may result in higher prices, though they could be partially offset by rising productivity. Unfortunately for the markets, it may also likely translate to falling margins and demand. The devil is in the details and relative proportions, but it’s hard to argue we’re headed down an entirely different path.
It appears the intersection of rising prices and falling demand will present a challenge to the Federal Reserve’s mandate. In the face of increasing inflation, we think it’s important for the Fed to resist the temptation to act preemptively in cutting rates and instead revert to its reactionary playbook. Politics can (and does) change on a whim, and markets hate that uncertainty. For those of us looking for answers, we would be well advised to remind ourselves that little in life is certain. The best we can do is to think outside of the world we know today and envision what may lie ahead. The direction of travel is clear even if the exact destination remains uncertain.
For institutional investor use only. This information is presented for informational purposes only. The opinions expressed herein are based on current market conditions and are subject to change without notice.