1 00:00:00,040 --> 00:00:02,120 Speaker 1: Well, let's see what our next guest has in his model. 2 00:00:02,200 --> 00:00:05,200 Speaker 1: Seth Carpenter joins us here in studio two, chief global 3 00:00:05,240 --> 00:00:07,920 Speaker 1: economists at Morgan Stanley. All right, set the question that 4 00:00:07,960 --> 00:00:11,240 Speaker 1: I'm sure you're being asked repeatedly today, how should we 5 00:00:11,320 --> 00:00:14,440 Speaker 1: look at economic growth and the potential impact based on 6 00:00:14,440 --> 00:00:16,520 Speaker 1: these tarift's assuming Trump goes through with them. 7 00:00:16,640 --> 00:00:18,360 Speaker 2: Yeah, well, I mean, I think the last part of 8 00:00:18,360 --> 00:00:20,959 Speaker 2: your question is absolutely key, assuming he goes through with it. 9 00:00:21,000 --> 00:00:23,200 Speaker 2: So we put out a piece a bunch of colleagues 10 00:00:23,200 --> 00:00:26,759 Speaker 2: and research coming into Asia open for Monday, and it 11 00:00:26,920 --> 00:00:29,680 Speaker 2: was let's game out three different scenarios for what might 12 00:00:29,760 --> 00:00:33,559 Speaker 2: happen if it's mostly a headfake, if the tariffs go 13 00:00:33,640 --> 00:00:35,520 Speaker 2: on and then they come off after a fairly short 14 00:00:35,520 --> 00:00:37,440 Speaker 2: period of time, and then if they're there for the duration. 15 00:00:38,240 --> 00:00:40,760 Speaker 2: And we tried to think through all the different scenarios 16 00:00:40,760 --> 00:00:43,280 Speaker 2: because guess what happened over the news flow of this morning. 17 00:00:43,560 --> 00:00:45,800 Speaker 2: We saw the announcement about the delay and the tariffs 18 00:00:45,800 --> 00:00:49,240 Speaker 2: from Mexico by something like a month. That seems like 19 00:00:49,280 --> 00:00:52,919 Speaker 2: it should leave open the door for further discussions, further negotiations, 20 00:00:52,920 --> 00:00:55,200 Speaker 2: and so maybe we really are And so the short 21 00:00:55,200 --> 00:00:58,160 Speaker 2: answer is you have to start with the way you 22 00:00:58,240 --> 00:01:00,360 Speaker 2: ended that with, assuming they go on. But what we 23 00:01:00,480 --> 00:01:03,440 Speaker 2: said is, you know, a range of views, lots of uncertainties, 24 00:01:03,440 --> 00:01:05,560 Speaker 2: but it could be a percentage pointer more off of 25 00:01:05,640 --> 00:01:09,280 Speaker 2: growth this year. And remember we're coming into this year 26 00:01:09,319 --> 00:01:11,760 Speaker 2: with a pretty strong growth rate in the economy, the 27 00:01:11,800 --> 00:01:14,080 Speaker 2: economy in solid places. We thought it would slow down 28 00:01:14,480 --> 00:01:17,800 Speaker 2: because we thought tariffs on China would gradually ramp up 29 00:01:17,840 --> 00:01:21,720 Speaker 2: over time. If we get this front loaded, really aggressive 30 00:01:21,840 --> 00:01:24,920 Speaker 2: tariffs on two of our big trade partners, you could 31 00:01:24,920 --> 00:01:26,959 Speaker 2: be talking about a percentage point and possibly more. 32 00:01:27,440 --> 00:01:29,360 Speaker 1: I know, it's hard to model that side of it, 33 00:01:29,400 --> 00:01:32,880 Speaker 1: which is probably the more hard number that you would use. 34 00:01:33,160 --> 00:01:35,479 Speaker 1: I am curious just about the uncertainty and how that 35 00:01:35,560 --> 00:01:39,959 Speaker 1: could potentially affect economic activity because let's say he does it, 36 00:01:40,000 --> 00:01:42,160 Speaker 1: then he removes him, or he reduces them, and or 37 00:01:42,160 --> 00:01:46,560 Speaker 1: he raises them. Is this something that companies, manufacturers, consumers 38 00:01:46,600 --> 00:01:49,000 Speaker 1: for that matter, can sort of sort out for themselves 39 00:01:49,040 --> 00:01:51,200 Speaker 1: over however long this goes on, or did they just 40 00:01:51,240 --> 00:01:53,480 Speaker 1: sort of retreat and say we're just not going to 41 00:01:53,520 --> 00:01:54,000 Speaker 1: do anything. 42 00:01:54,080 --> 00:01:55,720 Speaker 2: Yeah, I think some of all of the above. I 43 00:01:55,760 --> 00:01:58,440 Speaker 2: don't think you can ignore the uncertainty and has to 44 00:01:58,480 --> 00:02:01,440 Speaker 2: be relevant. When I talk to our core clients one 45 00:02:01,480 --> 00:02:03,320 Speaker 2: of the things that they do worry about is where 46 00:02:03,360 --> 00:02:05,480 Speaker 2: could we be wrong? Where is the uncertainty, and so 47 00:02:05,640 --> 00:02:08,840 Speaker 2: that's clearly part of it. We got recently last week 48 00:02:09,080 --> 00:02:12,320 Speaker 2: data on international trade. We saw a big increase in 49 00:02:12,440 --> 00:02:15,440 Speaker 2: imports to the US in December. Some of that almost 50 00:02:15,480 --> 00:02:19,320 Speaker 2: surely is reflection people trying to front run possible terists 51 00:02:19,320 --> 00:02:20,720 Speaker 2: because they didn't know what was going to go on, 52 00:02:21,040 --> 00:02:24,120 Speaker 2: So it has to matter. But then the economist in 53 00:02:24,200 --> 00:02:26,200 Speaker 2: me who plays with data says, let's see if we 54 00:02:26,200 --> 00:02:28,960 Speaker 2: can find some really good empirical measures, and it's really 55 00:02:28,960 --> 00:02:31,280 Speaker 2: hard to get everything to be consistent, to get a 56 00:02:31,280 --> 00:02:34,519 Speaker 2: clear reading. And quite honestly, this kind of uncertainty where 57 00:02:34,520 --> 00:02:37,280 Speaker 2: it's literally the President of the United States who gets 58 00:02:37,280 --> 00:02:40,200 Speaker 2: to be the final decider, we don't have a lot 59 00:02:40,240 --> 00:02:42,800 Speaker 2: of experience. We saw this in twenty seventeen, twenty eighteen, 60 00:02:42,840 --> 00:02:45,400 Speaker 2: twenty nineteen, but it's not as though we have a 61 00:02:45,440 --> 00:02:47,440 Speaker 2: dozen episodes where we can draw lessons. 62 00:02:47,919 --> 00:02:50,200 Speaker 3: And the difference between that last period is the FED 63 00:02:50,280 --> 00:02:52,720 Speaker 3: was hiking up cutting, so right now you're looking at 64 00:02:52,720 --> 00:02:54,720 Speaker 3: a little over forty basis points now priced him for 65 00:02:54,720 --> 00:02:57,200 Speaker 3: the rest of the year. Does this stay the Fed's hand. 66 00:02:57,520 --> 00:03:00,280 Speaker 2: I mean, I think that's another key question. So we've 67 00:03:00,320 --> 00:03:03,320 Speaker 2: been of the sort of dubbish side of things because 68 00:03:03,360 --> 00:03:07,600 Speaker 2: we see inflation really trending down so far before any 69 00:03:07,600 --> 00:03:10,240 Speaker 2: tariffs get put in place. And it does seem like, 70 00:03:10,320 --> 00:03:13,760 Speaker 2: including from Chair Powell's last press conference, that as long 71 00:03:13,800 --> 00:03:16,799 Speaker 2: as there's clear and convincing evidence that inflation is trending down, 72 00:03:16,840 --> 00:03:20,000 Speaker 2: they'll be willing to very cautiously nudge down the policy 73 00:03:20,080 --> 00:03:23,320 Speaker 2: rates and more. And it's a very important bud. At 74 00:03:23,360 --> 00:03:25,560 Speaker 2: the December of MC meeting, when they filled out their 75 00:03:25,560 --> 00:03:29,440 Speaker 2: surveys about their own economic projections, they said risks to 76 00:03:29,480 --> 00:03:32,720 Speaker 2: inflation are skewed to the upside. I think those risks 77 00:03:32,720 --> 00:03:35,520 Speaker 2: have been reinforced by the prospect of tariffs coming in 78 00:03:36,040 --> 00:03:39,520 Speaker 2: maybe sooner than people thought, and the data seem to 79 00:03:39,560 --> 00:03:43,360 Speaker 2: suggest that inflation does pick up after two or three 80 00:03:43,400 --> 00:03:47,520 Speaker 2: months after tariffs are imposed. The Fed will believe they'll 81 00:03:47,560 --> 00:03:50,480 Speaker 2: have their starting point being that the inflation effects will 82 00:03:50,520 --> 00:03:53,360 Speaker 2: be temporary, that it'll be a level shift higher in prices. 83 00:03:54,000 --> 00:03:57,280 Speaker 2: But boy, again the contrast to twenty eighteen, they were 84 00:03:57,400 --> 00:04:00,600 Speaker 2: raising rates very cautiously, but they were also coming off 85 00:04:00,640 --> 00:04:03,120 Speaker 2: of a decade where they couldn't get inflation up to 86 00:04:03,160 --> 00:04:06,600 Speaker 2: their two percent inflation through it different absolutely opposite situation 87 00:04:06,680 --> 00:04:09,200 Speaker 2: here where they're worried about will things keep coming down? 88 00:04:09,200 --> 00:04:11,720 Speaker 2: So they have no comfort. They can take no comfort 89 00:04:11,760 --> 00:04:13,560 Speaker 2: from the idea that it should be temporary. 90 00:04:13,640 --> 00:04:16,720 Speaker 3: Something that has held up is the labor market. Does 91 00:04:17,600 --> 00:04:21,120 Speaker 3: the tariff whip saw affect business sentiment and then affect 92 00:04:21,200 --> 00:04:23,800 Speaker 3: hiring or non firing or temp workers. 93 00:04:24,320 --> 00:04:26,520 Speaker 2: I think it absolutely can. But before we even get 94 00:04:26,520 --> 00:04:29,080 Speaker 2: to the uncertainty side of things, the tariffs themselves, and 95 00:04:29,120 --> 00:04:32,320 Speaker 2: I think this point is underappreciated if we look back 96 00:04:32,720 --> 00:04:36,120 Speaker 2: to twenty eighteen and nineteen. Remember we import a lot 97 00:04:36,160 --> 00:04:38,800 Speaker 2: of goods into the United States, but they're not all 98 00:04:38,960 --> 00:04:43,600 Speaker 2: finished consumer goods where it's just a tax on consumers. 99 00:04:43,640 --> 00:04:45,400 Speaker 2: To be sure, that's a huge part of it. When 100 00:04:45,400 --> 00:04:47,599 Speaker 2: we have finished goods coming in, you put a tariff 101 00:04:47,640 --> 00:04:50,320 Speaker 2: on it. It's a tax on consumption, full stop. But we 102 00:04:50,400 --> 00:04:53,839 Speaker 2: also import a lot of intermediate goods, capital goods, so 103 00:04:53,920 --> 00:04:57,760 Speaker 2: tariffs are also a tax on domestic capec spending. Tariffs 104 00:04:57,800 --> 00:05:01,360 Speaker 2: are also a tax on domestic man manufacturing because you're 105 00:05:01,360 --> 00:05:04,479 Speaker 2: taking in components and doing final assembly here. So what 106 00:05:04,600 --> 00:05:07,880 Speaker 2: happened in twenty eighteen and twenty nineteen. Industrial output fell 107 00:05:07,880 --> 00:05:09,839 Speaker 2: in twenty eighteen in the second half, and it kept 108 00:05:09,880 --> 00:05:14,479 Speaker 2: falling in twenty nineteen. Manufacturing employment was rising pretty strongly 109 00:05:14,520 --> 00:05:18,760 Speaker 2: in twenty sixteen and twenty seventeen, flattened out in twenty eighteen, 110 00:05:18,800 --> 00:05:21,200 Speaker 2: and then fell in twenty nineteen. I do think there's 111 00:05:21,240 --> 00:05:25,640 Speaker 2: a material downside risk to the employment picture here. And 112 00:05:25,680 --> 00:05:28,120 Speaker 2: again we're coming off of twenty twenty four where the 113 00:05:28,160 --> 00:05:29,919 Speaker 2: economy was just rock solid. 114 00:05:30,279 --> 00:05:32,400 Speaker 1: But is that just on the manufacturing side. I mean, 115 00:05:32,440 --> 00:05:34,960 Speaker 1: we know manufacturing is, at least in terms of employment 116 00:05:35,000 --> 00:05:38,120 Speaker 1: and even in terms of economic contribution, is a little 117 00:05:38,160 --> 00:05:40,560 Speaker 1: bit smaller or significantly smaller than what we see on 118 00:05:40,600 --> 00:05:43,440 Speaker 1: the services side. Is there a potential impact on the 119 00:05:43,480 --> 00:05:45,440 Speaker 1: services side of the economy. 120 00:05:45,520 --> 00:05:47,600 Speaker 2: Yeah, So anytime we see one part of the economy 121 00:05:47,600 --> 00:05:49,640 Speaker 2: start to slow down, it tends to have a ripple 122 00:05:49,680 --> 00:05:52,240 Speaker 2: effect and starts to affect other parts of the economy. 123 00:05:52,320 --> 00:05:55,200 Speaker 2: So as the tariffs that are on consumer goods, that 124 00:05:55,279 --> 00:05:57,880 Speaker 2: tax on consumer spending, they'll be less spending and my 125 00:05:58,000 --> 00:06:00,920 Speaker 2: spending that somebody else is in and so I think 126 00:06:00,960 --> 00:06:04,880 Speaker 2: that matters for just the broader economy. And similarly, people 127 00:06:04,880 --> 00:06:07,720 Speaker 2: who might lose their job in manufacturing, well, they go 128 00:06:07,800 --> 00:06:10,560 Speaker 2: out to dinner, they go to see movies, they go 129 00:06:10,600 --> 00:06:14,440 Speaker 2: to hotels, and so they're reduced. Spending transmits itself across 130 00:06:14,480 --> 00:06:18,000 Speaker 2: the economy as well. So this really is an economy 131 00:06:18,080 --> 00:06:20,920 Speaker 2: wide phenomenon. I think the first wave will be much 132 00:06:20,960 --> 00:06:23,960 Speaker 2: more localized where you can see the hit from the tariffs, 133 00:06:24,080 --> 00:06:26,120 Speaker 2: but then it starts to spread out. That's just the 134 00:06:26,240 --> 00:06:27,920 Speaker 2: nature of what an economy does. 135 00:06:28,040 --> 00:06:30,640 Speaker 1: When we talk about the goods affected at least and 136 00:06:31,040 --> 00:06:32,839 Speaker 1: the stuff that consumers are going to be keen to, 137 00:06:33,040 --> 00:06:36,560 Speaker 1: we also talk about agricultural products. Obviously, avocados could have 138 00:06:36,600 --> 00:06:40,120 Speaker 1: an impact on certain retail on certain restaurant chains. You 139 00:06:40,200 --> 00:06:42,719 Speaker 1: have things like apparel obviously that could have a huge 140 00:06:42,720 --> 00:06:45,920 Speaker 1: impact on certain retail chains. Then there's this whole issue 141 00:06:45,960 --> 00:06:48,119 Speaker 1: and it kind of gets a little bit into the weeds, 142 00:06:48,120 --> 00:06:49,760 Speaker 1: but it has to do with the e commerce and 143 00:06:49,800 --> 00:06:52,440 Speaker 1: that deminimous rule that's basically been a place since like 144 00:06:52,440 --> 00:06:55,120 Speaker 1: the late thirties or forties. I believe will that have 145 00:06:55,200 --> 00:06:58,320 Speaker 1: a material impact on our economic activity or is that 146 00:06:58,360 --> 00:07:01,400 Speaker 1: more of an impact on the Sian's and the tea 147 00:07:01,480 --> 00:07:02,640 Speaker 1: moves over there in China. 148 00:07:02,680 --> 00:07:04,960 Speaker 2: I mean, I think that's my guess. We've been trying 149 00:07:05,000 --> 00:07:08,000 Speaker 2: to again game out lots of different scenarios and say 150 00:07:08,000 --> 00:07:09,520 Speaker 2: at a little bit of a higher level, and so 151 00:07:09,720 --> 00:07:11,920 Speaker 2: they're going to be The one thing I can guarantee 152 00:07:11,920 --> 00:07:14,120 Speaker 2: you is that we're going to be surprised in some 153 00:07:14,280 --> 00:07:16,280 Speaker 2: corner of the world because we are in such an 154 00:07:16,280 --> 00:07:20,880 Speaker 2: integrated economy globally. We have seen some polls sort of 155 00:07:20,880 --> 00:07:23,200 Speaker 2: the so called multipolar world where things are spreading out. 156 00:07:23,200 --> 00:07:25,440 Speaker 2: But I am absolutely sure we're going to get surprised 157 00:07:25,480 --> 00:07:27,720 Speaker 2: because there's going to be a connection that we just 158 00:07:27,760 --> 00:07:28,440 Speaker 2: can't anticipate. 159 00:07:28,680 --> 00:07:31,040 Speaker 1: Who gets it worse. I mean, assuming Trump goes to it, 160 00:07:31,160 --> 00:07:32,880 Speaker 1: is it China? Is it the US? Is it Mexico? 161 00:07:32,920 --> 00:07:33,560 Speaker 1: It's a Canada. 162 00:07:33,720 --> 00:07:35,240 Speaker 2: I think it's a little bit of all the above. 163 00:07:35,280 --> 00:07:37,600 Speaker 2: What we said in the note we just put out 164 00:07:38,000 --> 00:07:42,240 Speaker 2: coming into as open for Monday was that if we 165 00:07:42,360 --> 00:07:45,880 Speaker 2: really went forward and the tariff stock Mexico probably would 166 00:07:45,920 --> 00:07:48,840 Speaker 2: go into recession. That's a really high probability event the 167 00:07:48,960 --> 00:07:52,280 Speaker 2: US because we're coming off of such a strong starting point. 168 00:07:52,680 --> 00:07:55,560 Speaker 2: That percentage point or so off of growth probably is 169 00:07:55,600 --> 00:07:58,520 Speaker 2: not enough to tip the US into into recession. And 170 00:07:58,600 --> 00:08:01,040 Speaker 2: I have to say economies like Mexico have a much 171 00:08:01,080 --> 00:08:03,280 Speaker 2: more challenging time. So if you think about the central 172 00:08:03,280 --> 00:08:07,080 Speaker 2: bank there, Mahiko, they have seen their currency weakend with 173 00:08:07,200 --> 00:08:10,000 Speaker 2: the threats of tariffs in the air. Then the announcement 174 00:08:10,040 --> 00:08:12,200 Speaker 2: of them made it go even more. So they have 175 00:08:12,240 --> 00:08:15,160 Speaker 2: to worry about can we lower the interest rate to 176 00:08:15,160 --> 00:08:18,520 Speaker 2: support the real economy. Well, no, because there's a risk 177 00:08:18,560 --> 00:08:21,000 Speaker 2: that the currency gets even weaker, which then drives up 178 00:08:21,080 --> 00:08:24,160 Speaker 2: domestic inflation war So they're really caught between a rock 179 00:08:24,200 --> 00:08:24,880 Speaker 2: and a hard place. 180 00:08:24,920 --> 00:08:26,520 Speaker 1: All right, Well said, I have to leave it there. 181 00:08:26,520 --> 00:08:28,440 Speaker 1: Speaking to currencies, we're going to come back after the 182 00:08:28,480 --> 00:08:30,680 Speaker 1: break with the deeper dive into the FX moves. Our 183 00:08:30,720 --> 00:08:33,559 Speaker 1: thanks there to Seth Carpenter. Global economists over at more 184 00:08:33,600 --> 00:08:34,040 Speaker 1: Instantly