Interactive Brokers Senior Economist Jose Torres discusses the impact of tariffs on the economy and the outlook for the American consumer with Bloomberg's Matt Miller on 'Bloomberg Brief.'

Washington

Donald Trump has signed an order to impose tariffs imports into the U.S. from countries including China, Mexico and Canada.

Global Tariffs

Experts indicate that tariffs in the 10-20% range on global trade partners are unlikely to cause significant disruption to the US economy. The impact of such tariffs is expected to be distributed among exporters, corporate buyers, and consumers, but overall inflation and economic growth are projected to remain stable. 

Recent economic data, including declining unemployment claims and rising services sector activity, point to a robust labor market and continued consumer spending. While some affordability pressures persist due to inflation, strong wage gains and capital market performance are supporting both lower- and upper-income consumers. Analysts also anticipate that corporate earnings and margins will remain healthy, aided by supply-side benefits such as lighter taxation and subdued energy costs.

Why 10-20% tariffs won't move the needle

Jose, it's really interesting because I think of you had told us in March tariffs would be 15%. That would be a sky is falling moment, but now it seems low. Trump has moved expectations so much. And in fact, it looks like those tariffs will be spread out between the exporter, the consumer, the corporate buyers here and the consumer. How do you see that affecting the economy? Good morning, Matt, great to see you. I don't see a significant impact. I think it's gonna be similar to Trump 1.0, where we saw inflation uncertainty, inflation bumpiness take us up to 2.9% on CPI, only to retreat back to the mid twos. You know, goods as a percentage of the overall inflation picture, core goods that is roughly just 20% also of the economy. So I don't think that tariffs between 10 and 20% on global trade partners are really gonna move the needle that much. When we look at yesterday's data, we saw initial unemployment claims fall for the sixth consecutive week to 217,000. That is the safe zone, that is expansion mode. And then when we look at the services PMI rising to a seven month high, you know, that points to a tight labor market, strong hiring, significant consumption, and together that bodes well for consumer spending going forward. You know, we think that the expansion has legs, earnings growth is strong from here, and much of the uncertainty from early April at this point seems unreasonable, and really bullish animal spirits and bullish winds from here. As far as what we're looking for, also looking for roughly two interest rate cuts from the Federal Reserve this year, according to our IVKR Forecast Trader, and that's really going to help broaden out the progress, Matt, because we're gonna start getting some more positive contributions from the manufacturing sector, which has been expanding sometimes, contracting others, and then the integral real estate sector, which has been in a recession for roughly three years now. Jose, what do you see in terms of effects on the consumer here? Anastasia Amoroso was on a couple of days ago saying she thinks the consumer's gonna have five, roughly 5% more after-tax income due to the one big, beautiful bill. However, we just spoke with Bhanu Bhawaja of UBS, and he thinks the consumer is gonna have less real income due to the effects of inflation. So how does it look to you? Well, I think that the consumer is gonna do well. One thing we've learned over the past few years is not to count out the American consumer. When we look at the labor market and wage gains, which have been propelled now due to immigration restrictiveness, that really helps the lower and middle-income cohorts. And then, Matt, we look at the capital markets and we look at the equities doing so well, that really helps the upper-income consumers. So really, across the board, we're looking for continued expansion. Of course, there's gonna be some affordability pressures at the lower end because of this inflationary episode, and inflation's still remaining in the mid-twos, not at the Fed's target yet. That's probably going to continue. I don't think that we get to 2% inflation for quite some time. I think we're gonna be tolerating slightly above-target price pressures. But overall, I think that the consumer is gonna do terrific because of job markets and capital markets. In terms of margins, if companies continue to eat these tariffs as they have, they're gonna shrink. What do you expect for earnings? You know, I think earnings are gonna do well. You're right. In some categories, in some aspects, like your colleague was mentioning earlier, there's gonna be some firms that are caught in the crosshairs, but those corporates that are more diversified, that are more spread out, you know, I think they're gonna do fine. I think earnings are gonna continue to grow. I think margins can stay wide. You know, we don't necessarily need to have expanding margins, but as long as they're stabilizing and the top line is growing, and maybe we can sustain a little bit of margin pressure and still grow the bottom line overall, you know, I think that's what we're looking for here. We have a lot of supply-side benefits that are coming up, like you mentioned earlier, lighter taxation, milder regulations, on-shoring initiatives, subdued energy costs driven by heavy production levels. You know, all of that is really disinflationary and positive for growth, and we're gonna see that translate to the bottom line, and that's why we're seeing investor sentiment so buoyant, and this market doing so well after 23 and 24 delivered gains in excess of 20%.

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Why 10-20% tariffs won't move the needle

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