April 25, 2025 • 23 mins
If you look at most of the official hard data right now, there still isn't much evidence of a sharp downturn. Sure, all the surveys are abysmal, but the actual measures of economic activity are ok. But there is already data showing something severe is happening, and that can be seen in the volume of cargo flowing from China to the US. Of course, this is intentional. This is the whole point of tariffs. But the fear is that this is going to be acute and dramatic to consumer companies, and that it will happen very soon. On this episode of the podcast we speak with Anna Wong, Chief US Economist at Bloomberg Economics, who walks us through the real life and macro-economic impact of what we've already seen. She says that the tariffs hit right at the moment that major retailers are planning for their holiday merchandise, and that before too long we'll start seeing fewer goods and fewer varieties of all kinds of things. We also discuss the inflation dynamics, and how tariffs may not show up in terms of higher CPI, but instead through higher layoffs, compressed profit margins, and falling real wages.
Read More: The Jaws That Could Devour Your Profit Margins
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:22):
I'm Joe Wisenthal and I'm Tracy Allaway.
Speaker 2 (00:24):
Tracy the number. One of the main things I'm watching
right now are those container shipping numbers that, at least
looking out at the next few weeks, it looks like
lots of actual orders are being canceled and there's the
risk of material shortage of things from China emerging in
a fairly short period of time.
Speaker 3 (00:45):
Yeah, I think we're kind of getting to the rubber
meets the road portion of the tariffs, right. So everyone
was talking about the potential of some sort of trade
restrictions going into this year because we knew that Trump
had won the election and he wanted to do some
of the stuff. And so what we saw broadly for
the first quarter was people trying to get ahead of that,
so building up their inventories, ordering a bunch of stuff
(01:09):
before some of those restrictions were expected to get in.
But of course that can only last so long. And
on Liberation Day, April second, Trump unveiled these really quite sweeping,
quite dramatic tariffs, as we all know by now, Yes,
and so I think people are starting to get concerned
that like now is when we're really going to begin
to see some of that impact.
Speaker 1 (01:30):
That's right.
Speaker 2 (01:30):
So, by the way we are recording this April twenty third,
it's two to thirty six pm. Yesterday we got a
little bit of softening and Trump saying, oh, it's not
gonna be one hundred and forty five. But then today
we got stuff there's like, there's not going to be
any unilateral concessions. We don't really know. There has been
this little softening of the tone. But look, one point
(01:51):
of tariffs is to reduce a reliance on China, to
partially decouple, et cetera. But then when you look at
the reality of okay, well that's what we're doing. We're decoupling,
we're buying less, it looks like it's coming very sharp
and fast, and perhaps to a degree that it's not
even really about inflation per se. Right, because I'll let
you know, a year ago people were talking about this
(02:12):
in the abstract, what does the fedgod do inflation? People
are talking about empty shelves of a lot of things.
Speaker 3 (02:17):
Well, I think this is still a big question, Like
I think there is some of this that could be
attenuated by companies just choosing to raise their prices and
maybe not order as many different types of things. But yeah,
we are seeing some analysts start to talk about the
possibility of empty shelves, and in fact, we're going.
Speaker 2 (02:35):
To speak to one now, that's right, we have the
perfect guest. We are going to be speaking with Anna Wong.
She is our chief US economist at Bloomberg Economics. Thank
you for joining us. Anna, you tweeted about empty shelves
in the sort of imminent term. What is the data
you're looking at and when would you expect to see
start people really start noticing it.
Speaker 4 (02:57):
Yeah, so and Tracy happy to be here again. So so,
you know, many people have been talking about how based
on the cancelation shipment and right now we have, as
you mentioned, we have seen plummeting container bookings, and already
in April, the first two weeks of April, we have
(03:19):
seen weekly imports data from China to US, even from
South Korea to US dropping very quickly. And and typically
when we think about holidays season retail, which is which
starts really with Halloween, uh in October, the US company
(03:43):
should be planning right now, right usually they plan uh
in the spring and they and then they start putting
in the orders now, especially for items like toys and
apparels and electronics longle time and so in in in
the summer, basically throughout June, July, August is when China
(04:06):
should be shipping these things to us. So we are
right in this period where all this planning has to happen.
Yet this is also when tariffs are implemented. So as
a result, the basically the inventory for Christmas, for Halloween
(04:27):
is already being disrupted right now. So even though it's
still many months away, and you know, with the ninety
day delay on the reciprocal tariffs, we are not you know,
it's not until July ninth where we have US firms
have better clarity on whether these tariffs fees of the
(04:50):
other country would be raised. And so basically it exactly
fell on this planning and shipping and producing period for
holiday season. So I think this is one reason why
just based on the high frequency data we have on
the volumes, on the quantities, the dropping of it, and
(05:10):
also just the you know, the timing of this this period,
it suggests that there's a high probability that we may
be seeing some empty shells in the holiday season, and
even with less varieties, I consider I basically consider that
part of the empty shelves just having less varieties.
Speaker 3 (05:34):
So talk to us about prices here, because you know,
I sort of mentioned in the intro that one thing
you could do if you're a retailer who isn't importing
as much as you used to, you could just raise
your prices massively, right in order to try to offset
some of the loss of supply. So this kind of
goes back to the old price over volume theme that
(05:55):
we saw during the COVID pandemic. Is that an option
here or is it the case that you think the
uncertainty is so high that people just aren't ordering pretty
much anything.
Speaker 4 (06:07):
Yeah, So we can look at some of the data,
because we already have data up to March for impro
prices PPI and CPI, and that covers basically two months
of the trade war, where US raise tariffs on China
by ten percent in February and then another ten percent
(06:28):
in March. That's already many times larger than in the
first trade war. So what we are seeing in the
in prices so far indicate that number one, most of
the Chinese tariffs have indeed been fully born by on
the US side, by you know whoever. But just we
(06:49):
can see that it's mostly one hundred percent passed through
at the border to US importers. This is with two
months of data. And second look at PPI data. This
is the next stage. Right once the US importers bring
in those products, they sell those products to intermediate firms
(07:10):
or even to know wholesale firms, to distributors. So the
next stage is looking at PPI. And we also have
seen a positive correlation between tariff shots across products in
February and March versus PPI increase in March. So there
(07:32):
is also some small pass through to PPI prices, but
not one hundred percent. So finally from PPI to CPI,
there you still have that big segment of wholesaler distributors
and this is where that passed through broke down. We
(07:54):
have not seen much evidence yet that it's showing up
in consumer prices. And in fact, if you plot a
similar scatter plot where you have on the vertical axis
the CPI change in March versus on the x axis
the tariff increased by product, you actually would see negative
(08:15):
correlation and meaning that the more China exposed it is
to that to in that good is actually the more
deflation you've seen. And we have seen that negative correlation
held over the last three months as well as for
most of last year, which suggests that there is actually
another major part to this whole trade war price pass
(08:39):
through story, which is China is going through a deflationary spiral,
and domestic prices in China is very very competitive right now.
So that's one element, and I think broadly these three
type of prices is consistent with what we are seeing
also in soft data, so in recent in recent days,
(09:01):
we have seen from Richmond FED, Philly FED, and various
manufacturing survey data that shows price paid have surged, yet
price received, even though it also has increased, has not
increased even to the amount of the price paid, which
(09:22):
suggests that a lot of the at least up to March,
the evidence is that much of the tariffs number one
has been born by the US side number two have
been absorbed through a compression of profit margins.
Speaker 3 (09:38):
Yeah, I think this is really important and also basically
the big question here is how much of that cost
passed through actually makes it down to consumers. And I'm
so glad Anna brought up the wholesalers because they're sort
of the forgotten, the forgotten element of price passed through
in all of this. And obviously they have their own
profit margins to worry about, but if they all absorbing
(10:01):
potentially some of the costs, and that does add a
sort of extra cushion on for consumers.
Speaker 2 (10:06):
By the way, yesterday April twenty second, in the newsletter,
I spotlighted this gap between prices received and prices paid
in some of those regional FED surveys, and Tracy was
kind enough to draw teeth on it to make it
look like the jaws of death that are coming for
your profit margins. And Okay, maybe the prices don't get
passed on to consumers fully, or maybe it's just partially
(10:29):
prices received just go up a lot. Tracy described it
as cushion. But what does economics tell us about when
profit margins get clobbered to profit margins go negative? What
does that do to the impulse for investment in hiring
and then the possibility of layoffs?
Speaker 4 (10:49):
Yeah, exactly, that is the key question. And when profit
margins are squeezed, it means the primary burden of adjustment
to tariffs fall on stock prices and also on unemployment
and capex. So we're expecting investment to significantly slow down
(11:11):
in the second half of this year and responds to
lower profit. Right, everything on the investment side respond to profits, right,
And also then ultimately on employment and real wages will adjust.
So on employment we are expecting it to go up
(11:32):
to four point eight percent by the end of this
year and peaking at five point three percent next year,
and real wages will fall. And you know services sector
account for about two thirds of the core PCE basket.
And so when you think about how you know, at
(11:53):
the end of the day, maybe a year from now,
what we will see is that there's basically a reality
between prices, right, so goods prices probably will be higher
on a level basis, but at the same time, real wages,
which drives services costs, will come down significantly. And you know,
(12:13):
some of the most demand elastic sectors in the economy
are travel related and with elasticity of demand that's higher
than one, and also to income as well, to income
that's higher than one. That means that when the economy
slows down, we should be seeing a lot of disinflationary
(12:34):
pressure coming from the services sector, and in fact, I
think we already have seen some early clues of that
in the March CPI report. Hotels, car rentals, airfares have
all been plummeting, seeing deflation actually in March, and even
in the Sep. Five hundred you see that it's the
(12:56):
airlines stock prices that have been hit the hardest because
that's where the discretionary spending will be pulling back.
Speaker 3 (13:19):
Let me just ask one question. One of the frustrations
that pretty much everyone operating in the economy right now
seems to have, including podcasters, by the way, is there
is so much uncertainty and the headlines are coming out
fast and furiously, it's really hard to keep up. And
you know, even if we get this episode out in
the next one or two days, we don't know if
(13:39):
the Trump administration is going to announce something completely different
when it comes to tariffs. How hard or easy will
it be to actually start to rebuild inventories if we
were to get some certainty on the Yeah, on the
Terroff question.
Speaker 4 (13:55):
Going back to the planning for a holiday season, right, so,
firms should be planning now for if they want goods
to be on the shelf in October, so it takes
at least six months for the whole planning to take place.
But does anybody have enough certainty about six you know,
(14:16):
and even in thirty days time to know to to
be ready to potentially get hit by tariffs. So an
example is what we have seen in February March in
the import price data and mentioned that almost one hundred
percent of the tariffs on China has been passed through
through the US border. And the thing is it's because
(14:39):
most of those goods had been entransit already before these
tariffs were even on the horizon, so they were already
en route in January, so there was no time to
discuss between the import and exporter how to share the burden. So,
for if the US firm is thinking about restore stocking,
(15:00):
suppose that they have enough stock to last them until
June based on the front running we have seen in
the imports data so far, so they have enough until
June and now they're planning. Should they start to uh
plan for restocking beyond June, then they need to basically
think like a risk neutral agent. So in economics, when
(15:22):
one is you know, In these models, when we think
about how does a person make a decision rational decision
in the phase of uncertainty, you calculate the risk neutral
you know, optimization equation. So it would be you know,
a probability of the scenario on the tariff multiplied by
the net cost UH and then plus you know different
(15:45):
probability of scenarios. So right now we have seen that
tariffs on China is you know, over well over one
hundred percent, and because of that extremely high cost to
that tail outcome, like suppose that there were further escalation
between you as a China and now you know that
(16:06):
the probability of tariff on China could potentially even go
to two hundred percent if you know, I'm not saying
that will happen, but it seems like quite plausible. Now
anything could happen. So in that case, your loss in
this you're trying to minimize this loss function, and then
you have a massive loss. This is why we are
(16:27):
seeing cancelation of orders. It's because in the risk neutral optimization,
given these high risk outcome, it doesn't make sense for
you to actually take the risk of potentially you know,
having the good arrived at the border only to find
out that, oh, you are two hundred percent of the tariffs.
(16:47):
And this is why there's it's a high probability that,
given the uncertainty and the time it takes to plan
for the goods to be on the shelf in the fall,
that I think is the high high probability outcome that
we all have all empty shells and lack of varieties.
Speaker 2 (17:05):
I just have one last question. You know, we're in
this sort of weird space where you know, we see
what's on the screen, and we see the surveys and
all that, but day to day life when I go
to the store is like pretty normal. And you know,
like we said, we haven't seen to pick up in
the layoffs data yet, even though everyone is anticipating all
the surveys are dismal. But you know, I think for most,
(17:27):
you know, the three of us anyway, buy and large
life goes on. Although Tracy has received emails from various
companies that she buys from.
Speaker 3 (17:36):
One of the things I'm learning in all of this
is that I am on a lot of mailing us
for random stuff. So I've gotten an email from a
company that sells fake flowers saying that their prices are
probably going to go up because so much of it
is made in China. I've gotten an email from a
provider of a home battery storage system because I was
kind of interested in that, saying that prices we're also
(17:57):
going to go up. So we'll see, we'll see what else.
Speaker 2 (18:00):
One thing about fake flowers, by the way, is that
was one of Hong Kong's very first export industries was
that they really they like current, they really like Yeah
they did. That was a huge you know. Then they
eventually did high tech things, but fake flowers was an
early uh it was an early industry. They came to
dominate this.
Speaker 5 (18:18):
And one of those random oh yes, Joe, and in
fact it was the bread and butter of the richest
man in Hong kongly couching has uh got has start
with making plastic flowers.
Speaker 1 (18:30):
This is so great.
Speaker 2 (18:31):
I like have this random random fact stuck in my
head and you know, I don't know how you remember that.
And then you were able to the alip there between
me and a real quickly holiday season potentially very damage.
But when do you would you say, we start to
see this in sort of either our day to day
lives or at least in hard data, Well, I.
Speaker 4 (18:52):
Think anecdotally it's already these stories are filtering in. I mean,
for anyone who will be having a broken AC system,
especially a central AC system, and comes summer, you'll find
that many of the parts are actually came from China,
only manufactured in China, and your service company will tell
(19:15):
you if they can't do nothing about it because nobody
is importing any of those parts. And you know there
will be more and more stories like that. In terms
of the hard data, I think in the April, meaning
next month, we will get the April's import volume data,
which for the whole month, and it will be clear
that the volume is already declining very quickly. And I
(19:39):
would I think for now, for people who collect big
data so web scraping, I think one could be scraping.
You know. You know how on Amazon it actually lists
how many of these items are remaining, Like it tells
you like three more left, more left. Start paying attention
(20:02):
to that, and you see that those three more left,
two more left is dwindling without increasing.
Speaker 3 (20:08):
Anna, You're going to add to my already innate tendency
to stockpile things. Thank you for the advice.
Speaker 2 (20:16):
Anna, think I'm sure you're as busy as we are,
updating models every day with every new headline. Thank you
so much for coming on odd Lote, No problem, Tracy,
(20:41):
that was unnerving. You know, this didn't actually come up.
But one of the things I've been thinking about is
the disparate impact that this will have on small versus
big businesses, because like a really big business, you know,
they can you know, could lose money right for a
quarter or two and go be you know, continue for
a while. As a going there are going to be
small businesses that literally just cannot pay that tariff bill
(21:05):
and that's lights out for them.
Speaker 5 (21:06):
Yeah.
Speaker 3 (21:06):
I think I wrote about this in the newsletter a
few weeks ago, but that seems almost certain to happen.
And also, you know, the bigger businesses obviously do have
some pricing power. They might have some ability to negotiate
with their suppliers, like I think Walmart is already trying
to do that with China at the moment. So yeah,
the scales seem very very much tipped in favor of
the big guys over at the small it is. It
(21:29):
is also very unsettling just to think that all of
this is by choice, right, Yeah, like this is a
policy decision by the current administration. It almost seems like
it was probably a bad time to do this, right
in the spring planning season, right before the summer shipping
season for the later retail buying season. Feels like this was, yeah,
(21:52):
not a great time.
Speaker 2 (21:53):
Well, you know, I find it interesting that for years,
since I was a teen, culture work the war on Christmas.
This is a literal no for real, right that we've
been hearing that forever, And Anna's talking about empty shelves
over the holidays.
Speaker 1 (22:05):
What is that?
Speaker 3 (22:06):
It's they're winning the War on Christmas. I don't know. Like, well,
on the plus side, I guess people have been complaining
about American consumerism for a very long time. So here
we go at exercise in austerity. Shall we leave it there?
Speaker 2 (22:20):
Let's leave it there.
Speaker 3 (22:21):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (22:26):
And I'm Joe Wisenthal. You can follow me at The Stalwart.
Follow Anna Wong, She's at Anna Economist. Follow our producers
Carman Rodriguez at Kerman Armann, dash O Bennett at Dashbot
and kill Brooks at Kelbrooks. For our odd Laws content.
Go to Bloomberg dot com slash odd Lots, where we
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you can chat with fellow listeners twenty four to seven.
(22:48):
What are you seeing out there in the real economy?
What niches are you aware of the way Tracy is
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Speaker 3 (22:59):
If if you enjoy odd Lots, if you like it
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(23:20):
and follow the instructions there. Thanks for listening.
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:22):
I'm Joe Wisenthal and I'm Tracy Allaway.
Speaker 2 (00:24):
Tracy the number. One of the main things I'm watching
right now are those container shipping numbers that, at least
looking out at the next few weeks, it looks like
lots of actual orders are being canceled and there's the
risk of material shortage of things from China emerging in
a fairly short period of time.
Speaker 3 (00:45):
Yeah, I think we're kind of getting to the rubber
meets the road portion of the tariffs, right. So everyone
was talking about the potential of some sort of trade
restrictions going into this year because we knew that Trump
had won the election and he wanted to do some
of the stuff. And so what we saw broadly for
the first quarter was people trying to get ahead of that,
so building up their inventories, ordering a bunch of stuff
(01:09):
before some of those restrictions were expected to get in.
But of course that can only last so long. And
on Liberation Day, April second, Trump unveiled these really quite sweeping,
quite dramatic tariffs, as we all know by now, Yes,
and so I think people are starting to get concerned
that like now is when we're really going to begin
to see some of that impact.
Speaker 1 (01:30):
That's right.
Speaker 2 (01:30):
So, by the way we are recording this April twenty third,
it's two to thirty six pm. Yesterday we got a
little bit of softening and Trump saying, oh, it's not
gonna be one hundred and forty five. But then today
we got stuff there's like, there's not going to be
any unilateral concessions. We don't really know. There has been
this little softening of the tone. But look, one point
(01:51):
of tariffs is to reduce a reliance on China, to
partially decouple, et cetera. But then when you look at
the reality of okay, well that's what we're doing. We're decoupling,
we're buying less, it looks like it's coming very sharp
and fast, and perhaps to a degree that it's not
even really about inflation per se. Right, because I'll let
you know, a year ago people were talking about this
(02:12):
in the abstract, what does the fedgod do inflation? People
are talking about empty shelves of a lot of things.
Speaker 3 (02:17):
Well, I think this is still a big question, Like
I think there is some of this that could be
attenuated by companies just choosing to raise their prices and
maybe not order as many different types of things. But yeah,
we are seeing some analysts start to talk about the
possibility of empty shelves, and in fact, we're going.
Speaker 2 (02:35):
To speak to one now, that's right, we have the
perfect guest. We are going to be speaking with Anna Wong.
She is our chief US economist at Bloomberg Economics. Thank
you for joining us. Anna, you tweeted about empty shelves
in the sort of imminent term. What is the data
you're looking at and when would you expect to see
start people really start noticing it.
Speaker 4 (02:57):
Yeah, so and Tracy happy to be here again. So so,
you know, many people have been talking about how based
on the cancelation shipment and right now we have, as
you mentioned, we have seen plummeting container bookings, and already
in April, the first two weeks of April, we have
(03:19):
seen weekly imports data from China to US, even from
South Korea to US dropping very quickly. And and typically
when we think about holidays season retail, which is which
starts really with Halloween, uh in October, the US company
(03:43):
should be planning right now, right usually they plan uh
in the spring and they and then they start putting
in the orders now, especially for items like toys and
apparels and electronics longle time and so in in in
the summer, basically throughout June, July, August is when China
(04:06):
should be shipping these things to us. So we are
right in this period where all this planning has to happen.
Yet this is also when tariffs are implemented. So as
a result, the basically the inventory for Christmas, for Halloween
(04:27):
is already being disrupted right now. So even though it's
still many months away, and you know, with the ninety
day delay on the reciprocal tariffs, we are not you know,
it's not until July ninth where we have US firms
have better clarity on whether these tariffs fees of the
(04:50):
other country would be raised. And so basically it exactly
fell on this planning and shipping and producing period for
holiday season. So I think this is one reason why
just based on the high frequency data we have on
the volumes, on the quantities, the dropping of it, and
(05:10):
also just the you know, the timing of this this period,
it suggests that there's a high probability that we may
be seeing some empty shells in the holiday season, and
even with less varieties, I consider I basically consider that
part of the empty shelves just having less varieties.
Speaker 3 (05:34):
So talk to us about prices here, because you know,
I sort of mentioned in the intro that one thing
you could do if you're a retailer who isn't importing
as much as you used to, you could just raise
your prices massively, right in order to try to offset
some of the loss of supply. So this kind of
goes back to the old price over volume theme that
(05:55):
we saw during the COVID pandemic. Is that an option
here or is it the case that you think the
uncertainty is so high that people just aren't ordering pretty
much anything.
Speaker 4 (06:07):
Yeah, So we can look at some of the data,
because we already have data up to March for impro
prices PPI and CPI, and that covers basically two months
of the trade war, where US raise tariffs on China
by ten percent in February and then another ten percent
(06:28):
in March. That's already many times larger than in the
first trade war. So what we are seeing in the
in prices so far indicate that number one, most of
the Chinese tariffs have indeed been fully born by on
the US side, by you know whoever. But just we
(06:49):
can see that it's mostly one hundred percent passed through
at the border to US importers. This is with two
months of data. And second look at PPI data. This
is the next stage. Right once the US importers bring
in those products, they sell those products to intermediate firms
(07:10):
or even to know wholesale firms, to distributors. So the
next stage is looking at PPI. And we also have
seen a positive correlation between tariff shots across products in
February and March versus PPI increase in March. So there
(07:32):
is also some small pass through to PPI prices, but
not one hundred percent. So finally from PPI to CPI,
there you still have that big segment of wholesaler distributors
and this is where that passed through broke down. We
(07:54):
have not seen much evidence yet that it's showing up
in consumer prices. And in fact, if you plot a
similar scatter plot where you have on the vertical axis
the CPI change in March versus on the x axis
the tariff increased by product, you actually would see negative
(08:15):
correlation and meaning that the more China exposed it is
to that to in that good is actually the more
deflation you've seen. And we have seen that negative correlation
held over the last three months as well as for
most of last year, which suggests that there is actually
another major part to this whole trade war price pass
(08:39):
through story, which is China is going through a deflationary spiral,
and domestic prices in China is very very competitive right now.
So that's one element, and I think broadly these three
type of prices is consistent with what we are seeing
also in soft data, so in recent in recent days,
(09:01):
we have seen from Richmond FED, Philly FED, and various
manufacturing survey data that shows price paid have surged, yet
price received, even though it also has increased, has not
increased even to the amount of the price paid, which
(09:22):
suggests that a lot of the at least up to March,
the evidence is that much of the tariffs number one
has been born by the US side number two have
been absorbed through a compression of profit margins.
Speaker 3 (09:38):
Yeah, I think this is really important and also basically
the big question here is how much of that cost
passed through actually makes it down to consumers. And I'm
so glad Anna brought up the wholesalers because they're sort
of the forgotten, the forgotten element of price passed through
in all of this. And obviously they have their own
profit margins to worry about, but if they all absorbing
(10:01):
potentially some of the costs, and that does add a
sort of extra cushion on for consumers.
Speaker 2 (10:06):
By the way, yesterday April twenty second, in the newsletter,
I spotlighted this gap between prices received and prices paid
in some of those regional FED surveys, and Tracy was
kind enough to draw teeth on it to make it
look like the jaws of death that are coming for
your profit margins. And Okay, maybe the prices don't get
passed on to consumers fully, or maybe it's just partially
(10:29):
prices received just go up a lot. Tracy described it
as cushion. But what does economics tell us about when
profit margins get clobbered to profit margins go negative? What
does that do to the impulse for investment in hiring
and then the possibility of layoffs?
Speaker 4 (10:49):
Yeah, exactly, that is the key question. And when profit
margins are squeezed, it means the primary burden of adjustment
to tariffs fall on stock prices and also on unemployment
and capex. So we're expecting investment to significantly slow down
(11:11):
in the second half of this year and responds to
lower profit. Right, everything on the investment side respond to profits, right,
And also then ultimately on employment and real wages will adjust.
So on employment we are expecting it to go up
(11:32):
to four point eight percent by the end of this
year and peaking at five point three percent next year,
and real wages will fall. And you know services sector
account for about two thirds of the core PCE basket.
And so when you think about how you know, at
(11:53):
the end of the day, maybe a year from now,
what we will see is that there's basically a reality
between prices, right, so goods prices probably will be higher
on a level basis, but at the same time, real wages,
which drives services costs, will come down significantly. And you know,
(12:13):
some of the most demand elastic sectors in the economy
are travel related and with elasticity of demand that's higher
than one, and also to income as well, to income
that's higher than one. That means that when the economy
slows down, we should be seeing a lot of disinflationary
(12:34):
pressure coming from the services sector, and in fact, I
think we already have seen some early clues of that
in the March CPI report. Hotels, car rentals, airfares have
all been plummeting, seeing deflation actually in March, and even
in the Sep. Five hundred you see that it's the
(12:56):
airlines stock prices that have been hit the hardest because
that's where the discretionary spending will be pulling back.
Speaker 3 (13:19):
Let me just ask one question. One of the frustrations
that pretty much everyone operating in the economy right now
seems to have, including podcasters, by the way, is there
is so much uncertainty and the headlines are coming out
fast and furiously, it's really hard to keep up. And
you know, even if we get this episode out in
the next one or two days, we don't know if
(13:39):
the Trump administration is going to announce something completely different
when it comes to tariffs. How hard or easy will
it be to actually start to rebuild inventories if we
were to get some certainty on the Yeah, on the
Terroff question.
Speaker 4 (13:55):
Going back to the planning for a holiday season, right, so,
firms should be planning now for if they want goods
to be on the shelf in October, so it takes
at least six months for the whole planning to take place.
But does anybody have enough certainty about six you know,
(14:16):
and even in thirty days time to know to to
be ready to potentially get hit by tariffs. So an
example is what we have seen in February March in
the import price data and mentioned that almost one hundred
percent of the tariffs on China has been passed through
through the US border. And the thing is it's because
(14:39):
most of those goods had been entransit already before these
tariffs were even on the horizon, so they were already
en route in January, so there was no time to
discuss between the import and exporter how to share the burden. So,
for if the US firm is thinking about restore stocking,
(15:00):
suppose that they have enough stock to last them until
June based on the front running we have seen in
the imports data so far, so they have enough until
June and now they're planning. Should they start to uh
plan for restocking beyond June, then they need to basically
think like a risk neutral agent. So in economics, when
(15:22):
one is you know, In these models, when we think
about how does a person make a decision rational decision
in the phase of uncertainty, you calculate the risk neutral
you know, optimization equation. So it would be you know,
a probability of the scenario on the tariff multiplied by
the net cost UH and then plus you know different
(15:45):
probability of scenarios. So right now we have seen that
tariffs on China is you know, over well over one
hundred percent, and because of that extremely high cost to
that tail outcome, like suppose that there were further escalation
between you as a China and now you know that
(16:06):
the probability of tariff on China could potentially even go
to two hundred percent if you know, I'm not saying
that will happen, but it seems like quite plausible. Now
anything could happen. So in that case, your loss in
this you're trying to minimize this loss function, and then
you have a massive loss. This is why we are
(16:27):
seeing cancelation of orders. It's because in the risk neutral optimization,
given these high risk outcome, it doesn't make sense for
you to actually take the risk of potentially you know,
having the good arrived at the border only to find
out that, oh, you are two hundred percent of the tariffs.
(16:47):
And this is why there's it's a high probability that,
given the uncertainty and the time it takes to plan
for the goods to be on the shelf in the fall,
that I think is the high high probability outcome that
we all have all empty shells and lack of varieties.
Speaker 2 (17:05):
I just have one last question. You know, we're in
this sort of weird space where you know, we see
what's on the screen, and we see the surveys and
all that, but day to day life when I go
to the store is like pretty normal. And you know,
like we said, we haven't seen to pick up in
the layoffs data yet, even though everyone is anticipating all
the surveys are dismal. But you know, I think for most,
(17:27):
you know, the three of us anyway, buy and large
life goes on. Although Tracy has received emails from various
companies that she buys from.
Speaker 3 (17:36):
One of the things I'm learning in all of this
is that I am on a lot of mailing us
for random stuff. So I've gotten an email from a
company that sells fake flowers saying that their prices are
probably going to go up because so much of it
is made in China. I've gotten an email from a
provider of a home battery storage system because I was
kind of interested in that, saying that prices we're also
(17:57):
going to go up. So we'll see, we'll see what else.
Speaker 2 (18:00):
One thing about fake flowers, by the way, is that
was one of Hong Kong's very first export industries was
that they really they like current, they really like Yeah
they did. That was a huge you know. Then they
eventually did high tech things, but fake flowers was an
early uh it was an early industry. They came to
dominate this.
Speaker 5 (18:18):
And one of those random oh yes, Joe, and in
fact it was the bread and butter of the richest
man in Hong kongly couching has uh got has start
with making plastic flowers.
Speaker 1 (18:30):
This is so great.
Speaker 2 (18:31):
I like have this random random fact stuck in my
head and you know, I don't know how you remember that.
And then you were able to the alip there between
me and a real quickly holiday season potentially very damage.
But when do you would you say, we start to
see this in sort of either our day to day
lives or at least in hard data, Well, I.
Speaker 4 (18:52):
Think anecdotally it's already these stories are filtering in. I mean,
for anyone who will be having a broken AC system,
especially a central AC system, and comes summer, you'll find
that many of the parts are actually came from China,
only manufactured in China, and your service company will tell
(19:15):
you if they can't do nothing about it because nobody
is importing any of those parts. And you know there
will be more and more stories like that. In terms
of the hard data, I think in the April, meaning
next month, we will get the April's import volume data,
which for the whole month, and it will be clear
that the volume is already declining very quickly. And I
(19:39):
would I think for now, for people who collect big
data so web scraping, I think one could be scraping.
You know. You know how on Amazon it actually lists
how many of these items are remaining, Like it tells
you like three more left, more left. Start paying attention
(20:02):
to that, and you see that those three more left,
two more left is dwindling without increasing.
Speaker 3 (20:08):
Anna, You're going to add to my already innate tendency
to stockpile things. Thank you for the advice.
Speaker 2 (20:16):
Anna, think I'm sure you're as busy as we are,
updating models every day with every new headline. Thank you
so much for coming on odd Lote, No problem, Tracy,
(20:41):
that was unnerving. You know, this didn't actually come up.
But one of the things I've been thinking about is
the disparate impact that this will have on small versus
big businesses, because like a really big business, you know,
they can you know, could lose money right for a
quarter or two and go be you know, continue for
a while. As a going there are going to be
small businesses that literally just cannot pay that tariff bill
(21:05):
and that's lights out for them.
Speaker 5 (21:06):
Yeah.
Speaker 3 (21:06):
I think I wrote about this in the newsletter a
few weeks ago, but that seems almost certain to happen.
And also, you know, the bigger businesses obviously do have
some pricing power. They might have some ability to negotiate
with their suppliers, like I think Walmart is already trying
to do that with China at the moment. So yeah,
the scales seem very very much tipped in favor of
the big guys over at the small it is. It
(21:29):
is also very unsettling just to think that all of
this is by choice, right, Yeah, like this is a
policy decision by the current administration. It almost seems like
it was probably a bad time to do this, right
in the spring planning season, right before the summer shipping
season for the later retail buying season. Feels like this was, yeah,
(21:52):
not a great time.
Speaker 2 (21:53):
Well, you know, I find it interesting that for years,
since I was a teen, culture work the war on Christmas.
This is a literal no for real, right that we've
been hearing that forever, And Anna's talking about empty shelves
over the holidays.
Speaker 1 (22:05):
What is that?
Speaker 3 (22:06):
It's they're winning the War on Christmas. I don't know. Like, well,
on the plus side, I guess people have been complaining
about American consumerism for a very long time. So here
we go at exercise in austerity. Shall we leave it there?
Speaker 2 (22:20):
Let's leave it there.
Speaker 3 (22:21):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (22:26):
And I'm Joe Wisenthal. You can follow me at The Stalwart.
Follow Anna Wong, She's at Anna Economist. Follow our producers
Carman Rodriguez at Kerman Armann, dash O Bennett at Dashbot
and kill Brooks at Kelbrooks. For our odd Laws content.
Go to Bloomberg dot com slash odd Lots, where we
have a daily newsletter and all of our episodes, and
you can chat with fellow listeners twenty four to seven.
(22:48):
What are you seeing out there in the real economy?
What niches are you aware of the way Tracy is
aware of artificial flowers? Chat with other listeners discord dot gg,
slash odlines.
Speaker 3 (22:59):
If if you enjoy odd Lots, if you like it
when we talk about what economists are seeing when it
comes to the impact of tariffs, then please leave us
a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
all of our episodes absolutely add free. All you need
to do is find the Bloomberg channel on Apple Podcasts
(23:20):
and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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