Speaker 1: Well, let's see what our next guest has in his model.
Speaker 1: Seth Carpenter joins us here in studio two, chief global
Speaker 1: economists at Morgan Stanley. All right, set the question that
Speaker 1: I'm sure you're being asked repeatedly today, how should we
Speaker 1: look at economic growth and the potential impact based on
Speaker 1: these tarift's assuming Trump goes through with them.
Speaker 2: Yeah, well, I mean, I think the last part of
Speaker 2: your question is absolutely key, assuming he goes through with it.
Speaker 2: So we put out a piece a bunch of colleagues
Speaker 2: and research coming into Asia open for Monday, and it
Speaker 2: was let's game out three different scenarios for what might
Speaker 2: happen if it's mostly a headfake, if the tariffs go
Speaker 2: on and then they come off after a fairly short
Speaker 2: period of time, and then if they're there for the duration.
Speaker 2: And we tried to think through all the different scenarios
Speaker 2: because guess what happened over the news flow of this morning.
Speaker 2: We saw the announcement about the delay and the tariffs
Speaker 2: from Mexico by something like a month. That seems like
Speaker 2: it should leave open the door for further discussions, further negotiations,
Speaker 2: and so maybe we really are And so the short
Speaker 2: answer is you have to start with the way you
Speaker 2: ended that with, assuming they go on. But what we
Speaker 2: said is, you know, a range of views, lots of uncertainties,
Speaker 2: but it could be a percentage pointer more off of
Speaker 2: growth this year. And remember we're coming into this year
Speaker 2: with a pretty strong growth rate in the economy, the
Speaker 2: economy in solid places. We thought it would slow down
Speaker 2: because we thought tariffs on China would gradually ramp up
Speaker 2: over time. If we get this front loaded, really aggressive
Speaker 2: tariffs on two of our big trade partners, you could
Speaker 2: be talking about a percentage point and possibly more.
Speaker 1: I know, it's hard to model that side of it,
Speaker 1: which is probably the more hard number that you would use.
Speaker 1: I am curious just about the uncertainty and how that
Speaker 1: could potentially affect economic activity because let's say he does it,
Speaker 1: then he removes him, or he reduces them, and or
Speaker 1: he raises them. Is this something that companies, manufacturers, consumers
Speaker 1: for that matter, can sort of sort out for themselves
Speaker 1: over however long this goes on, or did they just
Speaker 1: sort of retreat and say we're just not going to
Speaker 1: do anything.
Speaker 2: Yeah, I think some of all of the above. I
Speaker 2: don't think you can ignore the uncertainty and has to
Speaker 2: be relevant. When I talk to our core clients one
Speaker 2: of the things that they do worry about is where
Speaker 2: could we be wrong? Where is the uncertainty, and so
Speaker 2: that's clearly part of it. We got recently last week
Speaker 2: data on international trade. We saw a big increase in
Speaker 2: imports to the US in December. Some of that almost
Speaker 2: surely is reflection people trying to front run possible terists
Speaker 2: because they didn't know what was going to go on,
Speaker 2: So it has to matter. But then the economist in
Speaker 2: me who plays with data says, let's see if we
Speaker 2: can find some really good empirical measures, and it's really
Speaker 2: hard to get everything to be consistent, to get a
Speaker 2: clear reading. And quite honestly, this kind of uncertainty where
Speaker 2: it's literally the President of the United States who gets
Speaker 2: to be the final decider, we don't have a lot
Speaker 2: of experience. We saw this in twenty seventeen, twenty eighteen,
Speaker 2: twenty nineteen, but it's not as though we have a
Speaker 2: dozen episodes where we can draw lessons.
Speaker 3: And the difference between that last period is the FED
Speaker 3: was hiking up cutting, so right now you're looking at
Speaker 3: a little over forty basis points now priced him for
Speaker 3: the rest of the year. Does this stay the Fed's hand.
Speaker 2: I mean, I think that's another key question. So we've
Speaker 2: been of the sort of dubbish side of things because
Speaker 2: we see inflation really trending down so far before any
Speaker 2: tariffs get put in place. And it does seem like,
Speaker 2: including from Chair Powell's last press conference, that as long
Speaker 2: as there's clear and convincing evidence that inflation is trending down,
Speaker 2: they'll be willing to very cautiously nudge down the policy
Speaker 2: rates and more. And it's a very important bud. At
Speaker 2: the December of MC meeting, when they filled out their
Speaker 2: surveys about their own economic projections, they said risks to
Speaker 2: inflation are skewed to the upside. I think those risks
Speaker 2: have been reinforced by the prospect of tariffs coming in
Speaker 2: maybe sooner than people thought, and the data seem to
Speaker 2: suggest that inflation does pick up after two or three
Speaker 2: months after tariffs are imposed. The Fed will believe they'll
Speaker 2: have their starting point being that the inflation effects will
Speaker 2: be temporary, that it'll be a level shift higher in prices.
Speaker 2: But boy, again the contrast to twenty eighteen, they were
Speaker 2: raising rates very cautiously, but they were also coming off
Speaker 2: of a decade where they couldn't get inflation up to
Speaker 2: their two percent inflation through it different absolutely opposite situation
Speaker 2: here where they're worried about will things keep coming down?
Speaker 2: So they have no comfort. They can take no comfort
Speaker 2: from the idea that it should be temporary.
Speaker 3: Something that has held up is the labor market. Does
Speaker 3: the tariff whip saw affect business sentiment and then affect
Speaker 3: hiring or non firing or temp workers.
Speaker 2: I think it absolutely can. But before we even get
Speaker 2: to the uncertainty side of things, the tariffs themselves, and
Speaker 2: I think this point is underappreciated if we look back
Speaker 2: to twenty eighteen and nineteen. Remember we import a lot
Speaker 2: of goods into the United States, but they're not all
Speaker 2: finished consumer goods where it's just a tax on consumers.
Speaker 2: To be sure, that's a huge part of it. When
Speaker 2: we have finished goods coming in, you put a tariff
Speaker 2: on it. It's a tax on consumption, full stop. But we
Speaker 2: also import a lot of intermediate goods, capital goods, so
Speaker 2: tariffs are also a tax on domestic capec spending. Tariffs
Speaker 2: are also a tax on domestic man manufacturing because you're
Speaker 2: taking in components and doing final assembly here. So what
Speaker 2: happened in twenty eighteen and twenty nineteen. Industrial output fell
Speaker 2: in twenty eighteen in the second half, and it kept
Speaker 2: falling in twenty nineteen. Manufacturing employment was rising pretty strongly
Speaker 2: in twenty sixteen and twenty seventeen, flattened out in twenty eighteen,
Speaker 2: and then fell in twenty nineteen. I do think there's
Speaker 2: a material downside risk to the employment picture here. And
Speaker 2: again we're coming off of twenty twenty four where the
Speaker 2: economy was just rock solid.
Speaker 1: But is that just on the manufacturing side. I mean,
Speaker 1: we know manufacturing is, at least in terms of employment
Speaker 1: and even in terms of economic contribution, is a little
Speaker 1: bit smaller or significantly smaller than what we see on
Speaker 1: the services side. Is there a potential impact on the
Speaker 1: services side of the economy.
Speaker 2: Yeah, So anytime we see one part of the economy
Speaker 2: start to slow down, it tends to have a ripple
Speaker 2: effect and starts to affect other parts of the economy.
Speaker 2: So as the tariffs that are on consumer goods, that
Speaker 2: tax on consumer spending, they'll be less spending and my
Speaker 2: spending that somebody else is in and so I think
Speaker 2: that matters for just the broader economy. And similarly, people
Speaker 2: who might lose their job in manufacturing, well, they go
Speaker 2: out to dinner, they go to see movies, they go
Speaker 2: to hotels, and so they're reduced. Spending transmits itself across
Speaker 2: the economy as well. So this really is an economy
Speaker 2: wide phenomenon. I think the first wave will be much
Speaker 2: more localized where you can see the hit from the tariffs,
Speaker 2: but then it starts to spread out. That's just the
Speaker 2: nature of what an economy does.
Speaker 1: When we talk about the goods affected at least and
Speaker 1: the stuff that consumers are going to be keen to,
Speaker 1: we also talk about agricultural products. Obviously, avocados could have
Speaker 1: an impact on certain retail on certain restaurant chains. You
Speaker 1: have things like apparel obviously that could have a huge
Speaker 1: impact on certain retail chains. Then there's this whole issue
Speaker 1: and it kind of gets a little bit into the weeds,
Speaker 1: but it has to do with the e commerce and
Speaker 1: that deminimous rule that's basically been a place since like
Speaker 1: the late thirties or forties. I believe will that have
Speaker 1: a material impact on our economic activity or is that
Speaker 1: more of an impact on the Sian's and the tea
Speaker 1: moves over there in China.
Speaker 2: I mean, I think that's my guess. We've been trying
Speaker 2: to again game out lots of different scenarios and say
Speaker 2: at a little bit of a higher level, and so
Speaker 2: they're going to be The one thing I can guarantee
Speaker 2: you is that we're going to be surprised in some
Speaker 2: corner of the world because we are in such an
Speaker 2: integrated economy globally. We have seen some polls sort of
Speaker 2: the so called multipolar world where things are spreading out.
Speaker 2: But I am absolutely sure we're going to get surprised
Speaker 2: because there's going to be a connection that we just
Speaker 2: can't anticipate.
Speaker 1: Who gets it worse. I mean, assuming Trump goes to it,
Speaker 1: is it China? Is it the US? Is it Mexico?
Speaker 1: It's a Canada.
Speaker 2: I think it's a little bit of all the above.
Speaker 2: What we said in the note we just put out
Speaker 2: coming into as open for Monday was that if we
Speaker 2: really went forward and the tariff stock Mexico probably would
Speaker 2: go into recession. That's a really high probability event the
Speaker 2: US because we're coming off of such a strong starting point.
Speaker 2: That percentage point or so off of growth probably is
Speaker 2: not enough to tip the US into into recession. And
Speaker 2: I have to say economies like Mexico have a much
Speaker 2: more challenging time. So if you think about the central
Speaker 2: bank there, Mahiko, they have seen their currency weakend with
Speaker 2: the threats of tariffs in the air. Then the announcement
Speaker 2: of them made it go even more. So they have
Speaker 2: to worry about can we lower the interest rate to
Speaker 2: support the real economy. Well, no, because there's a risk
Speaker 2: that the currency gets even weaker, which then drives up
Speaker 2: domestic inflation war So they're really caught between a rock
Speaker 2: and a hard place.
Speaker 1: All right, Well said, I have to leave it there.
Speaker 1: Speaking to currencies, we're going to come back after the
Speaker 1: break with the deeper dive into the FX moves. Our
Speaker 1: thanks there to Seth Carpenter. Global economists over at more
Speaker 1: Instantly