The stock market may continue to be fearful of the fall-out from Trump's tariffs, with the big announcement of reciprocal tariffs on April 2. At this point, the fear is that economic growth and corporate earnings will be hurt, while inflation will speed up. This week's key US economic data may be viewed as too early to indicate any tariff effects. The market may get clarity on individual company impacts during the Q125 earnings season in April.
Overall, Trump's intention appears to be to bring manufacturing production back to the US from abroad. While the economy is operating close to full capacity, this result would likely be accomplished through a shift in resource allocation rather than by higher-than-otherwise overall activity. To some extent, cutbacks in government jobs and spending free up resources for this purpose. The markets could move in ways to accomplish it, as well. For example, higher interest rates would depress construction activity and higher prices would depress consumption. At the end, overall GDP would be about the same but the composition different.
The 25% auto/truck tariff may not hurt domestic motor vehicle manufacturers as much as feared. They would capture market share as sales shift from imports to their less expensive cars and trucks. Raising prices could help profits, as well, but it would have to be balanced against losing unit sales as a a result. This could be an important restraint on price hikes, as the "price elasticity" of vehicle demand is estimated to be high (see below).
The companies' profitability would be hurt, however, if the higher costs of parts can't be passed through to prices fully. For example, the company that uses imported parts the least presumably would raise prices the least. This could exert competitive pressure on other companies, dissuading them from passing through the full increase in costs. Trump's warning to domestic producers not to take advantage of the tariffs to raise prices also could weigh on pricing decisions. In contrast, auto companies might be able to cut other costs of production that offsets the effect of the tariffs at least in part.
There may be some unintended consequences, as well. /1/ From a macro perspective, an increase in demand for labor could boost wages and thus price inflation beyond the initial impact from the tariff. This result could necessitate tighter monetary policy. /2/ The tariffs could shift resources into "old" industries, hurting the ability of "new" industries, such as robotics, to expand profitably. /3/ The tariffs could help the environment by reducing demand for motor vehicles. However, an increased use of older, less efficient vehicles could worsen it.
Here is some background information regarding how tariffs may impact demand for motor vehicles:
Price Elasticity: This figure shows the percentage change in demand for a one percent change in price. The smaller the price elasticity of demand for vehicles, the smaller the decline in vehicle demand from a pass-through of the tariffs to prices. An extreme example would be completely inelastic demand. In this case, there would be no decline in vehicle demand for a full pass-through of the tariff.
The consensus estimate for the price elasticity of motor vehicles is about -1.0. This means that a 1 percent increase in price results in a 1 percent decline in demand. The price elasticity is higher for lower-income than upper-income people.
The cross elasticity between imports and domestically-produced vehicles could be higher than for the aggregate. So, the tariff should result in a significant switch in sales to domestically-produced vehicles from imported ones.
Tariff as a Tax: A tariff is essentially a "consumption" tax applied to a subset of goods. It is easy to avoid paying the tax directly -- don't buy an affected good. It may not be easy to avoid if the "tariffed" good is used in the production of other goods or services and the latter passes through the higher priced inputs. The tariff reduces the purchasing power of consumers to the extent it is not avoided.
This week's US economic data are expected to show modest economic growth. Consensus looks for little change in the Mfg ISM from 50.3. It also looks for a slowdown in March Nonfarm Payrolls to +128k from +151k in February and an uptick in the Unemployment Rate to 4.2% from 4.1% -- still an historically low level. A decline in government payrolls is expected to be partly responsible for the soft data. Near-consensus prints may not calm the markets' fears by much, as the data might be viewed as being too soon to see the recessionary effects of the tariffs. Furthermore, the risk of recession is higher when the economy's pace already is slow.