• Video
  • Inflation & Tariffs Weigh on US Consumers

Inflation & Tariffs Weigh on US Consumers

Show Transcript
Bloomberg Mar 13 11:15 · 34.1k Views

Nirupama Rao, University of Michigan, Assistant Professor speaks with Romaine Bostick and Scarlet Fu about the impact of tariffs on markets.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more

Transcript

  • 00:00 We, we've kind of been through this before.
  • 00:01 So we, I, I know things are different now.
  • 00:04 So we put that* there.
  • 00:05 But we do have somewhat of a template
  • 00:07 of what a tariff war looks like and what the potential economic fallout could be.
  • 00:12 Is the parallel, a true parallel?
  • 00:14 I mean, last time tariffs were 25% on steel, 10% on aluminum.
  • 00:19 We're going higher this time with aluminum.
  • 00:21 And I think it's actually hard to see what the economic argument there is.
  • 00:25 You know,
  • 00:26 US supply,
  • 00:27 especially of aluminium, is not particularly elastic,
  • 00:30 so production doesn't increase that much despite the high prices.
  • 00:34 So last time,
  • 00:35 you know, I think aluminium prices
  • 00:37 went up twice as much as steel prices
  • 00:39 despite having a lower tariff rate.
  • 00:41 In fact prices were so stubbornly high
  • 00:44 you just slow growth
  • 00:45 that they started exempting steel and aluminum in Canada and Mexico.
  • 00:49 Well, that's what I'm curious as to whether we we end up back there again.
  • 00:52 I mean I started my correction covering the steel industry
  • 00:55 and I've seen how little capacity we have now relative to when I started my career, which is only five years ago, but it was quite a quite some time ago.
  • 01:03 So the question is
  • 01:04 where does that supply come from?
  • 01:07 We don't have the capacity to match that.
  • 01:09 What we would lose from imports, assuming that, you know, people don't want to pay that 25%
  • 01:14 tax
  • 01:15 come from abroad just at a higher price.
  • 01:17 So what we saw last time is that higher price, right, has consequences.
  • 01:21 Before the last round of tariffs, the US used about 100 million tons of steel.
  • 01:24 A year.
  • 01:25 After those tariffs, it was just 93,000,000 tons.
  • 01:27 We saw less steel being used,
  • 01:30 users of steel, right?
  • 01:31 Home builders, automakers,
  • 01:33 company making your washing machine will find a way to make that washing machine with a little less steel,
  • 01:39 right?
  • 01:39 Maybe the drum's a little thinner,
  • 01:41 the parts a little bit different.
  • 01:42 So that's where we're going to see it.
  • 01:43 I mean, frankly, you know, it's one thing to double down on a policy
  • 01:47 that you think is going to actually achieve your goal.
  • 01:49 And, you know, there will be other consequences for the broad economy.
  • 01:52 But this is a case where it's
  • 01:55 sort of doubling down on something that didn't work the first time.
  • 01:58 You're talking about workarounds, you know, companies using less steel to make a washing machine, for instance.
  • 02:02 But the president's response to this is that his strategy is to repatriate US production and with it, jobs.
  • 02:08 And these may not be jobs at American companies, which I think can get confusing for some people, right?
  • 02:12 Because Alcoa lobbied against the 25% aluminum tariffs on Canadian imports because most of its manufacturing facilities
  • 02:18 are in Canada.
  • 02:19 Trump doesn't necessarily need to see American companies bring back jobs.
  • 02:22 It could be any company bring back jobs.
  • 02:24 I mean, the question though is, you know, it could be anywhere.
  • 02:27 Absolutely.
  • 02:28 And these are there are many foreign companies that operate in the United States, right?
  • 02:31 We have
  • 02:32 foreign steel makers, foreign auto companies, right.
  • 02:34 And so those jobs may actually, you know, at the end of the day
  • 02:37 contribute to the bottom line of
  • 02:39 foreign firms.
  • 02:40 But I think the hope is that it would improve jobs in this country, increase jobs in this country.
  • 02:44 But the question is
  • 02:46 what about the overall jobs outlook?
  • 02:48 Like last time, you know, we put the metal tariffs in and we got a few thousand more jobs in, you know,
  • 02:54 metal production, smelting, etcetera,
  • 02:56 but
  • 02:57 a few thousand jobs in those particular industries.
  • 03:00 At the same time we you know, could lose 10s of thousands of jobs in the affected industries.
  • 03:05 And some of those jobs that we might lose in manufacturing studies peg it at 75,000 jobs.
  • 03:10 Potentially
  • 03:11 they are better paying better jobs than some of the smelting jobs we might get.
  • 03:16 Oh, interesting.
  • 03:16 What do you
  • 03:17 how, how do companies who are facing higher costs, the ones who cannot get rid of all the
  • 03:22 steel in their washing machines do in terms of passing on cost?
  • 03:25 I mean, is it just a given that they're going to pass it on or can they absorb a little bit of it and will incorporate America and shareholders
  • 03:31 accept
  • 03:32 slightly lower profit margins?
  • 03:34 This is such a good question.
  • 03:36 So
  • 03:36 the way a tariff operates is it's like a supply contraction, right?
  • 03:40 And the way I teach my MBA first year students, it's like a shifting into the supply curve.
  • 03:44 You could have this lead to higher prices, you could have this lead to lower quantities,
  • 03:49 right?
  • 03:50 And you know,
  • 03:51 this particular economic moment, unlike 2018, which is a much stronger economy,
  • 03:56 we are seeing these glimmers of sort of
  • 03:59 maybe weakening consumer sentiment, maybe slightly less optimistic businesses, including small businesses.
  • 04:04 So that weakening of demand in the background might actually mean that we get less pass through,
  • 04:09 but we might have a situation where companies maybe
  • 04:11 eat a little bit more of it.
  • 04:12 Last time, I think, you know, the economics started to say that
  • 04:15 they were all passed through at 100% except for steel was 50%.
  • 04:18 And this time we could see a little weaker pass in that.
  • 04:20 I saw
  • 04:21 you guys have the CEO of Chipotle on
  • 04:23 earlier this week, right?
  • 04:24 Thanks for watching.
  • 04:25 And he, he mentioned, you know, that if the tariffs go through,
  • 04:29 they'll probably face higher avocado prices.
  • 04:31 And he said that Chipotle would eat that, you know,
  • 04:35 rather than pass it on to the consumer.
  • 04:37 But the question we have to ask is a Chipotle
  • 04:41 with narrower margins,
  • 04:42 is it going to open as many new locations?
  • 04:45 Are investors going to allocate as much capital
  • 04:48 to a Chipotle that has lower margins?
  • 04:49 Those are the big growth questions
  • 04:52 that we don't know the answers to in a world where we're facing tariffs and potentially not passing them through.
  • 04:58 There's also the the concern too, I mean.
  • 05:00 When you talk about the, the, the way that a lot of those costs were passed on last time,
  • 05:03 I mean, inflation was in a much different place.
  • 05:05 So now you already have
  • 05:07 high inflation, relatively high inflation on a on a historical basis, but you also have the imprint in a lot of people's minds.
  • 05:12 A lot of people are still going to the stores, whether it's for durable goods or their everyday goods, and they're still seeing prices higher than what they used to be.
  • 05:19 So is that going to make them more sensitive to all of a sudden if that washing machine goes up, say 5 or 10%?
  • 05:25 I mean, the tricky part of inflation, right, is that
  • 05:28 inflation expectations can be self fulfilling.
  • 05:30 And so, you know, we may see in some categories, we may not see full pass through, but consumers are expecting higher prices in every survey.
  • 05:37 And I think they are probably girding themselves to prepare for those higher prices, right.
  • 05:41 I think I've seen reports that
  • 05:43 private label producers, you know,
  • 05:45 who benefited as consumers kind of went down the the the sort of reputation gradient of products
  • 05:50 are now seeing weakening demand,
  • 05:52 right, which suggests that some of these prices reported that too.
  • 05:55 Yeah, we can report everything.
  • 05:56 Yeah,
  • 05:58 up.