CNBC's Steve Liesman reports on how inflation caused by tariffs may help the labor market by resulting in muted layoffs.

New York

A recent analysis by Morgan Stanley indicates that U.S. companies have largely managed to pass increased tariff costs onto consumers, which has helped maintain profits and limit layoffs. The report, referencing Q3 U.S. GDP data, suggests that this trend could reduce labor market risks and lower the probability of a recession in 2026.

While some companies have fared better than others in managing tariffs, the overall ability to raise prices has come at the expense of consumer sentiment. The report also notes that if consumer resistance to higher prices grows, companies may be forced to cut labor costs, potentially leading to layoffs. However, if tariff-driven inflation eases as forecast, job growth could pick up in the latter half of 2026.

How tariff inflation may help jobs

Inflation, tariffs, and jobs are a big part of the debate around the economic forecast for 2026. It's like they were all last year. Senior economics reporter Steve Leisman joins us now with a potential bright spot for the new year. And there were a lot of bright spots in the last year versus what the expectations were, Steve. Yeah, that's right, Joe. But one of the downsides of tariff was that companies would be forced to lay off workers if they couldn't pass along their added costs. But Morgan Stanley in a new report suggests the inflation this year, especially in the third quarter, shows companies can and did pass along tariff costs and preserve profits. That means layoffs were somewhat muted this year and could be avoided next year. Morgan Economist writing, we read the Q3 U.S. GDP data as suggesting U.S. corporates took a significant step towards recovering the cost of tariffs. In turn, this should mean less downside risk to the labor market and lower recession probabilities. That's in 2026. In Morgan's analysis, tariffs were absorbed in Q2, which meant to hit the profits. It was partly responsible for the soft payroll growth of the past two quarters. But you can see here, but between the first and third quarters, Morgan Stanley found that while tariffs increased costs, companies reduced unit labor costs, raised prices enough to actually boost profits more than costs increased. If firms found they couldn't push out output prices, Morgan said, higher on account of consumer resistance and loss of market share, then we think they would turn to reducing labor costs further, triggering layoffs. Tariff price increases could have one more quarter to go before easing next year. If Morgan Stanley is right, that easing of tariff inflation could coincide with a pickup of jobs in the second half of the year. The risk is that consumers end up balking at higher prices. And of course, this analysis is on average for companies. Some, as you just heard Jan Niffen say, fared better with tariffs and others fared worse, Joe. Interesting piece, what you've been talking about for months now, Steve, in the journal today. Nobody's getting necessarily laid off or that much, but nobody's getting hired. That's for sure. And it's AI. It's a perfect storm. It almost seems like immigration, AI and tariffs and just trying to do more with less. Yeah, I mean, what's cool about this Morgan report, Joe, is you can see the unit labor costs coming down, keeping a lid on labor and response to and you can see the what they call production taxes, which is that's the that's the line item, which is largely tariffs go up by about 9 percent over the two quarter period. If somebody had to pay it, Joe, that was always the case. And the question was, would it create broader inflation or would it create layoffs? It was always going to be one or the two because companies are going to act. That's our system in order to preserve their profits and profits. As again, you heard Jan say, we're pretty good. So companies adjusted by changing supply chains that help reduce the effective tariff costs. But you can see in the accounts of the Treasury, the tariffs were paid. So the good news is companies had the pricing power to pass along those costs. That, of course, was bad news for consumers. And you can see that show up in some of the polling data.

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Taipei City

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