We were in the camp that the new administration was using the threat of tariffs as an instrument to negotiate deals with other countries, especially with our largest trading partners, Canada and Mexico. However, that no longer seems to be the case, as President Trump announced a 25% tariff on all automobile imports starting April 3 and a 25% tariff on automotive parts starting May 2. These changes, which will remain in flux for several more months make it difficult to know the final effects of these measures. However, what is sure is that the uncertainty will remain with us for a bit longer and the costs of the tariffs will continue to increase.
We have stressed over the last several months that such high uncertainty is not good for economic activity. Consumers have been letting the administration know that they are not happy with these levels of uncertainty by responding to consumer confidence and sentiment surveys, which have dropped back to levels that existed before the presidential election. At the same time, there is a high probability that the uncertainty regarding tariffs has made consumers change their behavior. We have heard that people planning to buy a car later in the year have decided to buy the car today to avoid the extra costs expected by the increase in tariffs, etc. These ‘forced’ changes in behavior are, typically, not positive for economic activity because they push consumption forward and have the potential to reduce consumption in the future, especially for durable goods.
For firms, the high uncertainty environment is bad as many firms are scrambling to make the adjustments necessary for their businesses to remain competitive, to manage their inventory levels, to plan ahead, etc. For example, the February NFIB Small Business Survey showed a decline in seven of the ten components of the index compared to January due to increased uncertainty about the future. Still, business confidence seems to be in better shape than consumer confidence today, but the longer such high levels of uncertainty linger, the higher the probability that it creates increased stress in the economy.
Higher Prices for Smaller Cars
The increase in automobiles and automobile parts tariffs will hurt Americans in general but it will hurt those that are struggling economically and financially even more. As we have said in the past, American auto manufacturers decided a long time ago that they were not competitive nor profitable in producing small cars/sedans and decided to specialize in the production of light trucks (See our previous reports for May 24, 2024; February 7, 2025; and February 25, 2025), whose production has been protected with a 25% tariff since the 1960s. Thus, they have been importing cheaper/smaller cars and typically produce high-end light trucks in the US. However, the imposition of tariffs on small cars/sedans imports, even from Canada and Mexico, will increase the average price of small cars/sedans considerably, hitting lower-income Americans the most.
Since we no longer produce small cars, the new tariffs will have an immediate impact and while there have been reports that President Trump has asked automobile companies to refrain from increasing prices by using tariffs as an argument, it will be very difficult for them to do that if they want to remain in business. One of the arguments for tariffs used by the Trump administration is that they want automobile companies to increase domestic production. However, as we have argued before, this will need billions of dollars in new investments and could take from five to ten years. During this time, automobile companies will have to be able to raise capital for these new investments and they cannot do it if their businesses are losing money because they cannot raise prices to take into account tariffs.
Furthermore, the auto loan market is already on high alert. Delinquency rates on auto loans, as well as credit cards, have been on the rise for a while and are approaching levels not seen since the Great Recession. An increase in the price of cars is going to put even more stress on the automobile sector and the automobile lending market, as it will tend to reduce the number of potential buyers.
Changes to our inflation and economic forecast
Due to the recent changes in the administration’s policies regarding tariffs, we have further revised our forecast for economic growth this year from 2.0% to 1.8% as it seems that tariffs against Canada and Mexico are going to be higher than we had expected. We have also made changes to our inflation forecast to take into consideration these new developments.
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Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
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