Tariffs starting to creep into inflation readings, while summer air travel and freight figures sizzle

Trend watch

As we expected, weekly air passenger counts popped to 19.5 million, notching their highest level this year. That’s less than 1% below the all-time high of 19.7 million set last June. While those are robust figures, we probably won’t top the 20 million estimate we expected several weeks ago.

Additionally, the early June freight figures are sizzling, too. Container volumes at Los Angeles and Long Beach – the two largest U.S. ports – surged 17.8% in June, rebounding sharply after plunging 20.7% in May. The West Coast sister ports are also the closest to China and reflects the massive wave of freight following the relaxing of the U.S.-China tariff tiff that we’ve anticipated here. Moreover, this freight surge is reflected in a 12.0% jump in rail volumes in the most recent week. In turn, this freight will eventually disperse through the rest of the country by truck in the coming weeks on its way to its final destinations.

Our take

There’s an old adage in economics that things take longer than expected to happen, but when they do, they happen faster than expected. It was coined decades ago by famed MIT macroeconomist Rudi Dornbusch and is just as apt today.

The current economic indicators present a mixed picture, primarily influenced by the effects of tariffs, a situation we’ve repeatedly cautioned about here in recent months. Alas, there will likely be more noise than news for the foreseeable future.

The whipsaw in freight data illustrate this volatility clearly, with a surge in the first quarter, a decline in the second, and a rebound observed in June and July.

Yet, we’d forewarn that the same thing is occurring with respect to prices and tariffs. After months of waiting, we are only now beginning to see the impact of tariffs on price.

There are several reasons for this. Predominantly, many companies attempted to front run tariffs, ordering as much as possible late last year and early this year then stuffing most of it into inventories. Consequently, up till now, prices have largely reflected that pre-tariff inventory.

Additionally, there appears to be some cost sharing, especially by larger companies in certain industries, whereby they’re negotiating some concessions with overseas suppliers and vendors to split the impact of the tariffs.

For China, their currency weakened against the U.S. dollar after the tariff retaliations were announced. The weaker yuan makes Chinese goods cheaper for U.S. buyers. Elsewhere, there have been supply chain shifts – either sourcing from countries not subject to tariffs (like Canada and Mexico) or getting goods from those with lower tariffs.

In other cases, some companies are temporarily absorbing the tariffs, taking a hit on their profit margin rather than pass along the increased costs. While this is happening, companies won’t likely eat all the tariffs indefinitely.

Lastly, the tariff policy isn’t set. Thus, some businesses are likely waiting to fully change prices, while others like automakers have contract cycles.

Ultimately, it’s too early to assess how much of the tariffs will be passed along to consumers. While it probably won’t be 100%, our guesstimate is that it’s likely to be roughly two-thirds of the tariffs, depending on the product, whether there are substitutes, if production can shift, etc.

Bottom line

The U.S. economy finds itself in a “muddle-through” phase, where activity is inconsistent, yet the underlying structure remains stable. While the recent tax and debt ceiling agreements bring some optimism, ongoing uncertainties related to tariffs and trade policies continue to dampen growth. We also expect economic data to remain volatile due to tariffs, characterized by fluctuations as demand stabilizes following the surge in early spring when consumers and businesses sought to preemptively adjust to tariffs.