Trend watch
Air passenger counts fell for a second week, down 3.5% from last week to 17.3 million. Yet, as we highlight here last week, this year’s spring break travel is more spread out over March and April compared to 2024.
Rail carloads of motor vehicles jumped 8% in March and reached 17,745, the most since the pandemic (February 2020). That is more than likely automakers trying to take possession and pre-position inventory ahead of the new 25% auto tariffs, which started yesterday (April 3rd). Likewise, on slide 7, we show that consumers rushed to buy cars ahead of auto tariffs.
Our take
Earlier this week, the U.S. announced sweeping tariff increases on nearly all trading partners raising the baseline tariff rate to 10% globally from 2.5% currently. All will be implemented within a week. Canada and Mexico were spared from this proclamation, though will be still subject to the previously announced 25% auto tariffs.
Our read is that the average tariff rate will be close to 20% just for these tariffs. And that’s not including the recently announced sector tariffs for steel & aluminum and automotive, nor others that are reportedly coming such on semiconductors.
While characterized as reciprocal, these tariffs don’t appear to be equal to the rate charged on American goods. For instance, Europe charges 10% tariffs on U.S.-made automobiles, but the U.S. charges 2.5% on passenger cars but a 25% tariff pickup trucks, a retaliatory measure started in 1964.
Yet, the U.S. slapped Europe with 20% tariffs on all products. That will likely result in retaliation by the Europeans. Canada has already announced tariff increases, while Mexico promised to do so but has yet to reveal them. China said it would enact 34% tariffs on all U.S. goods. China is among the largest buyers of American agricultural products.
Additionally, there are some critical inconsistencies with the tariffs as currently structured that contradict their stated objectives. Most prominently, either manufacturing comes back home or the U.S gets trillions from charging tariffs over the next ten years, but both cannot be achieved. (Less imports because of more U.S. manufacturing would decrease tariffs revenues.) Meanwhile, the White House is quoting $6 trillion in revenues that will be used to offset tax cuts elsewhere.
Furthermore, the push for reshoring means higher manufacturing costs – even if wages were exactly the same, which they won’t be – simply due to the billions needed to build new plants or refurbish old structures. Companies won’t simply swallow higher costs indefinitely. And if they did, it will severely crimp corporate profits, which would likely curtail their payrolls.
Given the size and severity, we view these tariffs as an opening salvo by the White House. The good news is that implies that the ultimate tariff rate should be lower. Conversely, it also means many businesses will likely remain in “wait & see” mode, which isn’t pro-growth for the economy. That raises the risk of a recession as the sour sentiment could bleed into the hard data, which has largely held up to this point, including the strong March jobs report.
Moreover, with all-out blitz on literally every trading partner, it would seem difficult to negotiate with so many countries all at the same time. That’s not to mention the stated threats to “retaliate against retaliators.” This self-inflicted dynamic suggests a protracted timeframe to resolve these trade disputes.
Looking ahead, we are also increasingly concerned about the recently announced tariffs. At this point, we’ve only seen the aforementioned tariff front-running. But, pulling forward demand suggests that there is an impending air pocket of demand coming in the next few months.
Among our concerns are a raft of unintended consequences, particularly foreign buyers shunning all American made goods and services, not simply autos. Many iconic brands – like Coca-Cola and Disney – are closely associated with the United States. The trade war risks tarnishing such brands.
Ultimately, this uncertainty casts a long shadow over the economy, clouding decision making for businesses and consumers alike
Bottom line
The U.S. economy remains resilient, and we believe solid growth will endure; however, it’s in a holding pattern awaiting resolution on the tariffs. The longer this uncertainty lingers the more intense the headwind for the economy becomes in the near term. That has contributed to the recent bouts of volatility in financial markets, which we expect will continue for the foreseeable future.
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