WEBVTT - Morgan Stanley Chief Global Economist Seth Carpenter Talks Tariffs

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<v Speaker 1>Well, let's see what our next guest has in his model.

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<v Speaker 1>Seth Carpenter joins us here in studio two, chief global

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<v Speaker 1>economists at Morgan Stanley. All right, set the question that

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<v Speaker 1>I'm sure you're being asked repeatedly today, how should we

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<v Speaker 1>look at economic growth and the potential impact based on

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<v Speaker 1>these tarift's assuming Trump goes through with them.

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<v Speaker 2>Yeah, well, I mean, I think the last part of

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<v Speaker 2>your question is absolutely key, assuming he goes through with it.

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<v Speaker 2>So we put out a piece a bunch of colleagues

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<v Speaker 2>and research coming into Asia open for Monday, and it

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<v Speaker 2>was let's game out three different scenarios for what might

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<v Speaker 2>happen if it's mostly a headfake, if the tariffs go

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<v Speaker 2>on and then they come off after a fairly short

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<v Speaker 2>period of time, and then if they're there for the duration.

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<v Speaker 2>And we tried to think through all the different scenarios

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<v Speaker 2>because guess what happened over the news flow of this morning.

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<v Speaker 2>We saw the announcement about the delay and the tariffs

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<v Speaker 2>from Mexico by something like a month. That seems like

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<v Speaker 2>it should leave open the door for further discussions, further negotiations,

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<v Speaker 2>and so maybe we really are And so the short

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<v Speaker 2>answer is you have to start with the way you

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<v Speaker 2>ended that with, assuming they go on. But what we

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<v Speaker 2>said is, you know, a range of views, lots of uncertainties,

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<v Speaker 2>but it could be a percentage pointer more off of

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<v Speaker 2>growth this year. And remember we're coming into this year

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<v Speaker 2>with a pretty strong growth rate in the economy, the

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<v Speaker 2>economy in solid places. We thought it would slow down

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<v Speaker 2>because we thought tariffs on China would gradually ramp up

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<v Speaker 2>over time. If we get this front loaded, really aggressive

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<v Speaker 2>tariffs on two of our big trade partners, you could

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<v Speaker 2>be talking about a percentage point and possibly more.

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<v Speaker 1>I know, it's hard to model that side of it,

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<v Speaker 1>which is probably the more hard number that you would use.

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<v Speaker 1>I am curious just about the uncertainty and how that

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<v Speaker 1>could potentially affect economic activity because let's say he does it,

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<v Speaker 1>then he removes him, or he reduces them, and or

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<v Speaker 1>he raises them. Is this something that companies, manufacturers, consumers

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<v Speaker 1>for that matter, can sort of sort out for themselves

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<v Speaker 1>over however long this goes on, or did they just

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<v Speaker 1>sort of retreat and say we're just not going to

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<v Speaker 1>do anything.

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<v Speaker 2>Yeah, I think some of all of the above. I

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<v Speaker 2>don't think you can ignore the uncertainty and has to

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<v Speaker 2>be relevant. When I talk to our core clients one

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<v Speaker 2>of the things that they do worry about is where

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<v Speaker 2>could we be wrong? Where is the uncertainty, and so

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<v Speaker 2>that's clearly part of it. We got recently last week

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<v Speaker 2>data on international trade. We saw a big increase in

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<v Speaker 2>imports to the US in December. Some of that almost

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<v Speaker 2>surely is reflection people trying to front run possible terists

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<v Speaker 2>because they didn't know what was going to go on,

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<v Speaker 2>So it has to matter. But then the economist in

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<v Speaker 2>me who plays with data says, let's see if we

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<v Speaker 2>can find some really good empirical measures, and it's really

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<v Speaker 2>hard to get everything to be consistent, to get a

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<v Speaker 2>clear reading. And quite honestly, this kind of uncertainty where

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<v Speaker 2>it's literally the President of the United States who gets

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<v Speaker 2>to be the final decider, we don't have a lot

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<v Speaker 2>of experience. We saw this in twenty seventeen, twenty eighteen,

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<v Speaker 2>twenty nineteen, but it's not as though we have a

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<v Speaker 2>dozen episodes where we can draw lessons.

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<v Speaker 3>And the difference between that last period is the FED

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<v Speaker 3>was hiking up cutting, so right now you're looking at

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<v Speaker 3>a little over forty basis points now priced him for

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<v Speaker 3>the rest of the year. Does this stay the Fed's hand.

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<v Speaker 2>I mean, I think that's another key question. So we've

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<v Speaker 2>been of the sort of dubbish side of things because

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<v Speaker 2>we see inflation really trending down so far before any

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<v Speaker 2>tariffs get put in place. And it does seem like,

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<v Speaker 2>including from Chair Powell's last press conference, that as long

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<v Speaker 2>as there's clear and convincing evidence that inflation is trending down,

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<v Speaker 2>they'll be willing to very cautiously nudge down the policy

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<v Speaker 2>rates and more. And it's a very important bud. At

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<v Speaker 2>the December of MC meeting, when they filled out their

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<v Speaker 2>surveys about their own economic projections, they said risks to

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<v Speaker 2>inflation are skewed to the upside. I think those risks

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<v Speaker 2>have been reinforced by the prospect of tariffs coming in

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<v Speaker 2>maybe sooner than people thought, and the data seem to

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<v Speaker 2>suggest that inflation does pick up after two or three

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<v Speaker 2>months after tariffs are imposed. The Fed will believe they'll

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<v Speaker 2>have their starting point being that the inflation effects will

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<v Speaker 2>be temporary, that it'll be a level shift higher in prices.

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<v Speaker 2>But boy, again the contrast to twenty eighteen, they were

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<v Speaker 2>raising rates very cautiously, but they were also coming off

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<v Speaker 2>of a decade where they couldn't get inflation up to

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<v Speaker 2>their two percent inflation through it different absolutely opposite situation

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<v Speaker 2>here where they're worried about will things keep coming down?

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<v Speaker 2>So they have no comfort. They can take no comfort

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<v Speaker 2>from the idea that it should be temporary.

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<v Speaker 3>Something that has held up is the labor market. Does

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<v Speaker 3>the tariff whip saw affect business sentiment and then affect

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<v Speaker 3>hiring or non firing or temp workers.

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<v Speaker 2>I think it absolutely can. But before we even get

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<v Speaker 2>to the uncertainty side of things, the tariffs themselves, and

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<v Speaker 2>I think this point is underappreciated if we look back

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<v Speaker 2>to twenty eighteen and nineteen. Remember we import a lot

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<v Speaker 2>of goods into the United States, but they're not all

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<v Speaker 2>finished consumer goods where it's just a tax on consumers.

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<v Speaker 2>To be sure, that's a huge part of it. When

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<v Speaker 2>we have finished goods coming in, you put a tariff

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<v Speaker 2>on it. It's a tax on consumption, full stop. But we

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<v Speaker 2>also import a lot of intermediate goods, capital goods, so

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<v Speaker 2>tariffs are also a tax on domestic capec spending. Tariffs

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<v Speaker 2>are also a tax on domestic man manufacturing because you're

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<v Speaker 2>taking in components and doing final assembly here. So what

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<v Speaker 2>happened in twenty eighteen and twenty nineteen. Industrial output fell

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<v Speaker 2>in twenty eighteen in the second half, and it kept

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<v Speaker 2>falling in twenty nineteen. Manufacturing employment was rising pretty strongly

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<v Speaker 2>in twenty sixteen and twenty seventeen, flattened out in twenty eighteen,

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<v Speaker 2>and then fell in twenty nineteen. I do think there's

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<v Speaker 2>a material downside risk to the employment picture here. And

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<v Speaker 2>again we're coming off of twenty twenty four where the

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<v Speaker 2>economy was just rock solid.

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<v Speaker 1>But is that just on the manufacturing side. I mean,

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<v Speaker 1>we know manufacturing is, at least in terms of employment

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<v Speaker 1>and even in terms of economic contribution, is a little

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<v Speaker 1>bit smaller or significantly smaller than what we see on

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<v Speaker 1>the services side. Is there a potential impact on the

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<v Speaker 1>services side of the economy.

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<v Speaker 2>Yeah, So anytime we see one part of the economy

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<v Speaker 2>start to slow down, it tends to have a ripple

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<v Speaker 2>effect and starts to affect other parts of the economy.

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<v Speaker 2>So as the tariffs that are on consumer goods, that

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<v Speaker 2>tax on consumer spending, they'll be less spending and my

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<v Speaker 2>spending that somebody else is in and so I think

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<v Speaker 2>that matters for just the broader economy. And similarly, people

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<v Speaker 2>who might lose their job in manufacturing, well, they go

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<v Speaker 2>out to dinner, they go to see movies, they go

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<v Speaker 2>to hotels, and so they're reduced. Spending transmits itself across

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<v Speaker 2>the economy as well. So this really is an economy

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<v Speaker 2>wide phenomenon. I think the first wave will be much

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<v Speaker 2>more localized where you can see the hit from the tariffs,

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<v Speaker 2>but then it starts to spread out. That's just the

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<v Speaker 2>nature of what an economy does.

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<v Speaker 1>When we talk about the goods affected at least and

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<v Speaker 1>the stuff that consumers are going to be keen to,

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<v Speaker 1>we also talk about agricultural products. Obviously, avocados could have

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<v Speaker 1>an impact on certain retail on certain restaurant chains. You

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<v Speaker 1>have things like apparel obviously that could have a huge

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<v Speaker 1>impact on certain retail chains. Then there's this whole issue

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<v Speaker 1>and it kind of gets a little bit into the weeds,

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<v Speaker 1>but it has to do with the e commerce and

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<v Speaker 1>that deminimous rule that's basically been a place since like

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<v Speaker 1>the late thirties or forties. I believe will that have

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<v Speaker 1>a material impact on our economic activity or is that

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<v Speaker 1>more of an impact on the Sian's and the tea

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<v Speaker 1>moves over there in China.

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<v Speaker 2>I mean, I think that's my guess. We've been trying

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<v Speaker 2>to again game out lots of different scenarios and say

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<v Speaker 2>at a little bit of a higher level, and so

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<v Speaker 2>they're going to be The one thing I can guarantee

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<v Speaker 2>you is that we're going to be surprised in some

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<v Speaker 2>corner of the world because we are in such an

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<v Speaker 2>integrated economy globally. We have seen some polls sort of

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<v Speaker 2>the so called multipolar world where things are spreading out.

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<v Speaker 2>But I am absolutely sure we're going to get surprised

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<v Speaker 2>because there's going to be a connection that we just

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<v Speaker 2>can't anticipate.

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<v Speaker 1>Who gets it worse. I mean, assuming Trump goes to it,

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<v Speaker 1>is it China? Is it the US? Is it Mexico?

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<v Speaker 1>It's a Canada.

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<v Speaker 2>I think it's a little bit of all the above.

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<v Speaker 2>What we said in the note we just put out

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<v Speaker 2>coming into as open for Monday was that if we

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<v Speaker 2>really went forward and the tariff stock Mexico probably would

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<v Speaker 2>go into recession. That's a really high probability event the

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<v Speaker 2>US because we're coming off of such a strong starting point.

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<v Speaker 2>That percentage point or so off of growth probably is

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<v Speaker 2>not enough to tip the US into into recession. And

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<v Speaker 2>I have to say economies like Mexico have a much

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<v Speaker 2>more challenging time. So if you think about the central

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<v Speaker 2>bank there, Mahiko, they have seen their currency weakend with

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<v Speaker 2>the threats of tariffs in the air. Then the announcement

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<v Speaker 2>of them made it go even more. So they have

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<v Speaker 2>to worry about can we lower the interest rate to

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<v Speaker 2>support the real economy. Well, no, because there's a risk

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<v Speaker 2>that the currency gets even weaker, which then drives up

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<v Speaker 2>domestic inflation war So they're really caught between a rock

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<v Speaker 2>and a hard place.

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<v Speaker 1>All right, Well said, I have to leave it there.

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<v Speaker 1>Speaking to currencies, we're going to come back after the

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<v Speaker 1>break with the deeper dive into the FX moves. Our

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<v Speaker 1>thanks there to Seth Carpenter. Global economists over at more

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<v Speaker 1>Instantly