Weekly Research Briefing: Tariff Week

@KevRGordon: U.S. pending home sales have fallen to a new all-time low

‬The Conference Board consumer confidence survey for February shows a big jump in the share of consumers who are worried about fewer jobs being available.

With 160 million employed in the U.S., 3 million federal employees and 6 million federal contractors facing uncertainty, job fears are growing. This could lead households to pull back on big purchases—cars, computers, appliances, and travel—adding to economic risks.

‬‪“The consumer right now is confused,” Kontoor Brands Inc. CEO Scott Baxter said during the company’s quarterly call with analysts. “If you just put yourself in their seat, they’re worried about work. They’re worried about the businesses that they’re in. Are those going to be impacted by some of the layoffs, the tariffs, the current situation right now?”...

Baxter said consumers are wondering when they’ll “be able to get back to some sort of normalcy.”

“Any time the consumer is feeling a little bit under attack like that, they get very conservative,” he said. “And I think that we are in this country right now seeing that conservatism from the consumer because of their worry.”

‬‪Stanford University is implementing a hiring freeze as colleges and universities across the US confront the threat of severe funding cuts from the Trump administration.

The Trump administration this month moved to curtail a type of research funding for universities from the National Institutes of Health. The proposal was paused by a judge amid legal challenges, but Stanford has said the change would reduce its funding by approximately $160 million per year.

“Though this is currently under review by the courts, a cut of this magnitude would have a significant negative budget impact at Stanford,” President Jonathan Levin and Provost Jenny Martinez said in a statement Wednesday. “There is also uncertainty about the level of direct federal funding for scientific research.”...

Stanford has joined Harvard, the University of Pennsylvania and other schools in warning that they face deep impacts from the Trump proposal to cut NIH funding.

Penn, for its part, has called the threat “existential” and said the change would reduce funding for medical research by about $240 million, likely resulting in the elimination of thousands of jobs in Philadelphia.

Applications for US unemployment benefits rose to the highest this year, amid an increase in job-cuts announcements at corporations and federal agencies.

Initial claims increased by 22,000 to 242,000 in the week ended Feb. 22, matching the highest level since October, according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 221,000 applications.

The pickup in new applications coincides with a number of staff-reduction plans at high-profile corporations such as Starbucks Corp., Meta Platforms Inc. and Southwest Airlines Co. Economists have also been on the lookout out for the ripple effects from the firings of workers across federal agencies by the Trump administration.

In Washington, DC, applications rose to the highest level since March 2023, continuing an uptrend that started at the beginning of the year. Claims in Maryland and Virginia, where there is also a high concentration of federal workers, both fell.

Trump’s new measures came without public forewarning and took officials in both countries by surprise. Neither side on the working level was aware the additional 10% tariffs were coming, according to a person familiar with the matter.

The levies are set to take effect on Tuesday, one day before President Xi Jinping heads into the party’s biggest political meeting of this year, the National People’s Congress, where his lieutenants will unveil their economic blueprint for 2025.

While the tariffs are unlikely to sway the growth target or fiscal policy for the year, which have been set for months, they could dampen sentiment. In a meeting hosted by Xi on Friday, China’s elite Politburo reiterated a pledge to expand domestic demand as well as to stabilize the housing and stock markets — all topics likely on the agenda at next week’s huddle.

Specifically, we envision a scenario in which trade costs between the U.S. and China increase for final and intermediate goods. We assume that U.S. trade costs for all Chinese imports increase 20 percentage points—capturing the imposition of U.S. tariffs on Chinese imports, to which China partially retaliates by raising tariffs on U.S. goods 10 percentage points. The scenario is somewhat more severe than the 2018–19 increase in trade tensions between the U.S. and China, when the U.S. imposed a tariff rate of a similar magnitude on a narrower set of imported goods. The increase in trade costs occurs in quarter 1 (figure 4) is expected to be highly persistent, in line with the persistence in our trade costs measure.

In the scenario, U.S. inflation rises and U.S. GDP growth slows (figure 4). The effect on inflation is significant: The increase in trade costs drives U.S. inflation up by 0.5 percentage point and causes it to remain persistently elevated. The contribution of trade costs in final goods (the gray bars) is short lived and vanishes by the fifth quarter. Thus, a hike in trade costs on final goods leads largely to a one-time step-up in the price level, without a persistent increase in the rate of inflation itself. By contrast, the contribution of higher trade costs in intermediates (the red bars) induces a persistently elevated inflation rate relative to the baseline. As the costs of importing inputs from China rise, U.S. firms react by making greater use of inputs sourced from other regions, including the U.S. itself. These other inputs, however, are not perfect substitutes for inputs imported from China, leading to lower production efficiency for U.S. firms. As a consequence, U.S. production costs increase persistently, translating into higher inflation for longer. The associated higher policy rates contribute to a persistent drag on GDP growth relative to the baseline (right panel).

“Whipsaw. That’s an accurate description,” Rogge said in an interview. “Can we please, God, know what’s going to happen so we can plan accordingly?” he said. “What I want is no tariffs. What I want after that is certainty.”

Tormach is relatively small, with about 100 employees, split between the U.S. and Mexico, but its efforts to respond to fast-coming changes in trade policy threaten to ripple through the economy. Many of its customers are startups and small businesses that buy Tormach’s low-cost machines, typically priced at $10,000 to $50,000, then graduate to more expensive ones.

Trump’s tariff policies could prompt the company to focus more on sales to foreign companies, executives said, and less on selling to the small U.S. businesses that are engines of domestic job growth...

At a Feb. 11 meeting, Tormach’s board discussed the need to focus more, at least in the short term, on making machine tools in Mexico and selling them directly to foreign customers, given the uncertainty about U.S. trade policy.

“It’s a sad irony,” Rogge said. “We are used to selling to people who are creating jobs. Now, we are going to help create jobs in Argentina.”

North America produced roughly 16 million cars in 2023, according to the International Organization of Motor Vehicle Manufacturers, and most are assembled using steel, equipment and parts from all three countries. Tariffs would increase prices for new vehicles by thousands of dollars, which could reduce demand and lower production volume, particularly for American automakers General Motors, Ford and Stellantis, said S&P Global Ratings.

“There’s been decades of investment, decades of each country developing what it’s good at,” said Linda Hasenfratz, Linamar’s executive chair. “To try to now disassemble that is just going to drive a lot of cost and sacrifice.”

The same dynamic applies to other parts. The manufacturing of pistons shows the extensive industrial integration between the three countries, said Eduardo Solís, a consultant who previously led Mexico’s automotive industry association. “Pistons go back and forth several times within the three countries before they are assembled into a vehicle that is then exported to the U.S.,” he said.

If the president goes ahead with 25% taxes on imports from Canada and Mexico on Tuesday, he will disrupt more than $300 billion in annual U.S. automotive trade with its two neighbors, wreck supply chains that have been operating for decades and likely push up the already-forbidding price of new cars.

The tariffs pose an “existential’’ threat to North American auto production, said David Gantz, a fellow at Rice University’s Baker Institute for Public Policy. They will push up “the cost of everything that’s imported from Mexico or Canada that goes into a car assembled in the U.S.’’

Kelley Blue Book says Trump’s tariffs could raise the U.S. price of the average new car – already approaching $49,000 – by $3,000 or more. The price of some full-size pickup trucks could shoot up by $10,000.

Approximately 100,000 U.S. aluminum industry jobs could be on the chopping block due to tariffs targeting the metal, according to Alcoa Chief Executive William Oplinger.

The Pittsburgh-based aluminum company estimates that a 25% tariff on aluminum imports would result in about 20,000 direct U.S. industry jobs being cut and as many as 80,000 indirect jobs being eliminated, Oplinger said Tuesday at the BMO Global Metals and Mining conference.

“We’re clearly advocating based on the fact that this is bad for the aluminum industry in the U.S.,” Oplinger said. “It’s bad for American workers.”

The U.S. aluminum industry directly employs more than 164,000 workers, according to the Aluminum Association, meaning about 12% of jobs could be affected by the tariff. The industry supports nearly 700,000 direct, indirect and induced jobs, producing more than $228 billion in economic output, according to the trade group...

Alcoa has some idle capacity in the U.S., though it is “very old, very inefficient capacity that has not been run in a number of years,” Oplinger said. There are significant costs associated with restarting these operations, and uncertainty surrounding the tariff, such as how long it would be in place, makes executing strategies difficult.

“We make decisions around aluminum production that have a horizon of 20 to 40 years,” he said. “We would not be making an investment in the United States based on a tariff structure that could be in place for a much shorter period of time.”

President Donald Trump’s 25% tariffs on imported aluminum, set to go into place March 12, will raise the cost to produce every whimsically adorned can of Spiteful beer, from its Working for the Weekend Double IPA to its Fat Badger Ale.

For Spiteful and other craft brewers, the results may be inevitable: libation inflation.

“Imagine something that you’re buying every day goes up 25% overnight,” said Jason Klein, 42, co-founder of Spiteful Brewing. “We would have no choice but to raise prices — there’s no way we can absorb that.”...

Spiteful buys its cans directly from Ball, a Colorado-based company and the largest U.S. manufacturer. All of the cans delivered to Spiteful are sourced from Canada, Klein said.

“For us, in packaging, it’s probably the most expensive part of what’s in a six-pack,” he said.

A typical Spiteful six-pack sells for $11.99 on store shelves, Klein said. He expects the retail price to go up at least $1 per six-pack after the tariff hits.

US President Donald Trump’s threatened steel tariffs that don’t kick in for two weeks are impacting US buyers who already are seeing American-made metal cost more than imports.

The benchmark price for domestic steel touched more than $900 a ton this week, up almost one-fourth this year, in anticipation of the imminent 25% levy on foreign supplies. That surge means US prices have now moved above par with imported steel, according to people active in the market who asked not to be named discussing non-public information.

“What we’re seeing so far happen is mills capitalize on the tariffs and uncertainty of tariffs, and they’ve been able to raise prices such that at $900 a ton it’s more than what would happen to price with an actual 25% tariff implemented,” Timna Tanners, an analyst at Wolfe Research, said during a telephone interview. “This isn’t the desired outcome Trump has articulated.”

The construction sector is bracing for the impact of the Trump administration’s tariffs, and though the exact nature of the fallout remains unclear, cost increases are all but guaranteed, according to Skanska USA’s winter construction market report...

Much of the tariff-related cost increases would come from pricier materials, which comprise around half a project’s total cost. Domestic manufacturers could meet a significant share of that supply gap, according to the report. But assuming a 20% tariff average on the remaining materials, a typical project could end 4% to 8% more expensive.

Materials at risk run the gamut: HVAC equipment, electrical gear, generators, steel, elevators, curtain wall, finished goods, lumber, drywall, fixtures and more.

A third of cement imports into the U.S. come from Canada and Mexico, and Canada is the largest supplier of U.S. lumber. U.S. builders could look to replace lumber imports from elsewhere, but those foreign alternatives will respond in kind, according to Jeffrey Smoker, a Skanska vice president who works in the firm's Cincinnati office.

“The reality of economics is if the price goes up one place, the price is going up across the board,” he said.

The threat of new tariffs, including those on Canada and Mexico, could complicate home building supply chains and ultimately drive-up costs for buyers, the industry warns. “The cost of building is now just going to go up, and is ultimately going to be borne by the home buyer or renter,” says the NAHB’s Tobin.

Tariffs on Canada and Mexico, which produce lumber, and the gypsum used in drywall, are of particular concern—as are appliances from China. The president announced the tariffs in early February before postponing enforcement of those on Canada and Mexico to early March. Meanwhile, home builders are working on contingency plans to source from other countries or use different materials, says KBW analyst Jade Rahmani. “But no doubt there would be impact,” he adds. New lumber tariffs could shrink builder margins by as much as three percentage points, Rahmani wrote recently.

Some in the industry hope that tariffs are a bargaining tactic and won’t happen. “President Trump is a businessman; he is a former real estate developer,” says Isaac Toledano, co-founder of the Florida luxury condo developer BH Group. “At the end of the day, I think that this is a negotiation tactic.”

But even the threat of tariffs is disrupting the housing market. An indication of future construction, the NAHB’s sentiment index, dropped in February by five points, its greatest decline since last May. “Uncertainty over the scale and scope of tariffs has builders further concerned about costs,” says Robert Dietz, the trade group’s chief economist.

In the new world, economies, markets, and policies are more segmented. Tariffs and geopolitical considerations limit the flow of goods. There are more restrictions on immigration. Countries have different industrial policies, which have made the rules for businesses more unpredictable and idiosyncratic.

The consequence of moving from a global economy to a segmented economy consisting of many separate “islands” is permanently higher inflation everywhere. Imported goods are more expensive, domestically produced goods are more expensive, less immigration makes domestic labor more expensive, and different industrial policies in different countries reduce competition.

The bottom line is that globalization was putting downward pressure on inflation. Segmentation, or deglobalization, is putting upward pressure on inflation.

Canadian travelers are redirecting their dollars to warm weather destinations outside the United States, with some seasonal residents even selling properties. (Though the trade feud is helping fuel this, the weak Canadian dollar is also playing a role.)

Canada is the leading country of origin for foreign tourists to the United States, according to the U.S. Travel Association, an industry group. Last year Canadians made more than 20 million visits to the United States and spent $20.5 billion.

Ahead of spring break for schools across Canada, there are signs that Canadians are heeding the suggestions of Canadian officials, including Prime Minister Justin Trudeau, to rethink their vacation plans.

A Feb. 27 survey by the Quebec Tourism Industry Alliance, a province that makes up a sizable portion of Canada’s snowbirds, found that half of travelers who planned to visit the United States this year said they had canceled their trips. (Tourists to the United States from Quebec spend about $6 billion annually, according to the Tourism Industry Alliance.)

Extending the tax cut would leave the budget deficit at 7% of GDP in fiscal year 2029, based on CBO and Joint Committee on Taxation estimates. To get it to 3% and then keep it there would require $12 trillion of spending cuts over the next decade relative to the status quo, by my calculations. But House Republicans, in their recently passed budget resolution, envision only $1.5 trillion to $2 trillion of spending cuts. (They penciled in additional deficit reduction via a growth dividend from their plans, which my estimates exclude.)

Trump has made the job especially difficult by ruling out any cuts to Social Security or Medicare. Throw in interest on the debt, and half of spending is now off limits. To hit a 3% deficit in 2029 would require cutting 40% from everything else—defense, homeland security, veterans benefits, Medicaid, food stamps, welfare, and countless other federal programs. Zeroing out Medicaid and food stamps and firing every federal employee won’t be enough. And Republicans are already balking at cuts to Medicaid.

So either Republicans put Social Security, Medicare and taxes on the table, await a growth miracle, or accept a much less ambitious deficit target.

We expect that the next round of DOGE and cost reduction may focus on larger Medicare and Medicaid payments, looking to target waste, fraud and abuse in these much larger entitlement programs. DOGE staff are already working at CMS (Centers for Medicare & Medicaid Services) to target “opportunities for more effective and efficient use of resources.” We expect that there will be new efforts to audit and limit Medicare payments and target Medicaid payments as well.

In addition, we highlight an upcoming regulation currently under review at OMB (Office of Management and Budget) that includes Healthcare Exchange Plan Program Integrity proposals that may significantly reduce enrollment and growth in the ACA (Affordable Care Act) exchange plans and reduce excess premium subsidies. Other regulatory actions that CMS may target include Medicaid enrollment eligibility, Medicaid access and Home and Community Based Services, states use of Medicaid provider taxes and state directed payment programs, and long-term care staffing requirements.

Demand on the Texas power grid is expected to expand so immensely that it would take the equivalent of adding 30 nuclear plants’ worth of electricity by 2030 to meet the needs.

That’s according to the Electric Reliability Council of Texas, which manages the grid. The forecast is based on the addition of new data centers needed to power artificial intelligence. And it’s raising concerns about whether infrastructure in the state will be able to expand fast enough — and at what cost.

Coming out of the pandemic, electricity demand on the Texas grid was already growing faster than anywhere else in the country. Now that’s being supercharged by AI, with the state vying to become the data-center hub of the country, if not the world. Individual projects are already starting to request 1 gigawatt of power and they pose new risks to maintaining a stable grid, said Agee Springer, Ercot’s senior manager of grid interconnections. A gigawatt is typically enough to power 250,000 homes in Texas.

The data centers “present a reliability risk to the Ercot system,” said Springer, who spoke on a panel at Infocast’s ERCOT Market Summit in Austin this week.

Stark Contrasts: Private Equity vs. Public Equity Performance

From January 2018 through June 2024, European private equities outperformed public equities by a margin of 106%. In North America during the same period, the outperformance margin was 25%.

The key drivers? First, Europe’s public markets delivered lackluster returns. This contrasts with North American equities which surged on the back of record valuations. Second, European private equity demonstrated resilience, with returns (almost) keeping pace with North America’s.

This puts a spotlight on the fact that investors have choices when they’re striving for a geographically diversified portfolio.

On this particular night, the volume was low because Marquardt had to be dialed in. In a page or two, the high school sophomore wanted to capture what to say to his sports hero.

He poured his heart into his words, and as a poor student hoping for the letter to be perfect, he later took it to his English teacher for help. The teacher wondered why a student with flunking grades was suddenly motivated but made the corrections nonetheless. It was handwritten, so every mistake meant a rewrite. The final product was five pages and took a month to finish.

“I remember everything I wrote in that letter,” says Marquardt, now 59.

Mike, my name is Jim Marquardt. I play hockey, and I’m trying to learn the best I can. I watch you play, but there’s so much that I don’t know. I need some help.

Marquardt quizzed Liut on how he defended a two-on-one rush, how he dealt with pressure, how he forgot a bad goal. But this communication was more than an aspiring goalie asking technical questions of a professional. The teen didn’t have a hockey team. He was academically ineligible to play in his first three years of high school. And he had a troubled home life...

“My parents wanted the best for all of us, but their lifestyles were rough,” he says. “I loved them dearly, but there were things — looking back, it was a brutal environment. Hockey was my ‘In case of emergency, break glass!'”

And Liut was the mentor that Marquardt desperately needed.