Lee: Tariffs are not a big lever to hold back GDP growth, as imports are only 14% of GDP

Key Concepts:

• Tariffs and Inflation
• GDP Impact of Imports
• Consumer Sentiment (University of Michigan, Conference Board)
• Consumer Spending
• Auto Tariffs
• Substitution Effect (Tequila vs. Bourbon)
• Soft Data vs. Hard Data
• Anticipatory Imports
• Federal Reserve (Fed) Rate Cuts

1. Tariffs and Inflation:

• The argument that tariffs cause inflation is largely based on surveys reflecting anxiety about potential price increases due to tariffs.
• Imports constitute only 14% of GDP, suggesting that tariffs, even if substantial, may not significantly impact overall GDP growth or cause high inflation pressures.
• The US is characterized as a relatively closed economy, which mitigates the inflationary impact of tariffs.
• Core inflation has primarily been driven by domestic services, not international goods.

2. GDP Impact of Imports:

• Imports represent 14% of GDP, which is not considered a large lever to significantly hold back GDP growth.
• Uncertainty surrounding the implementation of President Trump's MAGA agenda is identified as a more significant source of economic uncertainty than tariffs themselves.
• Anticipatory imports, driven by concerns about future tariffs, can cause a mechanical slowdown in GDP.

3. Auto Tariffs:

• Auto tariffs are expected to raise the cost of vehicles, potentially by as much as $6,000 for Canadian and Mexican-made vehicles, according to Cox.
• Lower-cost vehicles and lower-end consumers are expected to be disproportionately affected by auto tariffs.
• Auto expenditures account for only 3% of overall consumer expenditures, making it a relatively small portion of overall consumption.

4. Consumer Sentiment:

• The University of Michigan consumer sentiment number, particularly the five-year outlook, has been concerning to investors, with the latest reading at 4.1%, the highest since February 1993.
• The Michigan survey is highly correlated with the stock market, and the Conference Board survey is correlated with the ability to get jobs easily.
• Consumer spending is slowing down, but not as much as suggested by sentiment surveys.

5. Substitution Effect:

• Consumers may be able to switch from high-cost imports to lower-cost domestically produced goods, mitigating the impact of tariffs.
• Tequila is presented as a counterexample, as it can only be sourced from one place, limiting substitution possibilities.

6. Soft Data vs. Hard Data:

• Consumer sentiment data is considered "soft data," while actual consumer spending and GDP figures are considered "hard data."
• The argument is made that until hard data starts to react negatively, concerns based on soft data may be premature.

7. Federal Reserve (Fed) Rate Cuts:

• Goldman Sachs has raised its outlook for Fed rate cuts this year from two to three.
• The likelihood of Fed rate cuts depends on whether there is a serious slowdown in the economy and a rise in the unemployment rate.

8. Notable Quotes:

• "The tariff inflation talk really is based on surveys... showing people's anxiety."
• "It's only 14% of GDP. So we're not talking a big chunk of GDP that's going to be affected by tariffs."
• "I absolutely guarantee you your cost of living is going to go up [if you're a tequila drinker or a big fan of avocados]."
• "Until we actually see the hard data start to react badly, I think you need to chill out a bit."

9. Synthesis/Conclusion:

The discussion revolves around the potential impact of tariffs on inflation, GDP, and consumer behavior. While tariffs are expected to increase the cost of certain goods, particularly autos, their overall impact on the economy may be limited due to the relatively small share of imports in GDP and the possibility of consumer substitution. Consumer sentiment data suggests a slowdown in spending, but hard data on consumer spending and GDP has not yet confirmed this trend. The likelihood of Fed rate cuts depends on the severity of any economic slowdown.