Economic Briefing

Tariffs have been used by administrations for centuries. Recently, with the emerging strength of modern manufacturing techniques that drive the cost of production lower, sensitivities to price imbalances are high. Starting really under the Obama Administration, the use of tariffs has been a popular move across administrations and regardless of party affiliation.

During the first Trump Administration, the use of tariffs added less than 0.2 percentage points to macro inflation at the time (which was running 1.7%). However, for some companies that were hit directly by the tariffs, it certainly had a significant impact on their profitability and created some near-term operating challenges.

Even prior to inauguration, negotiations and discussions are ongoing between Trump officials and foreign dignitaries to avoid trade wars. Whether this changes sourcing strategy is yet to be seen. But with the Biden Administration largely keeping all the prior tariffs in place and recently adding more of their own, construction of manufacturing facilities in the US has ballooned over the past three years. Construction firms reported building more than $236 billion in facilities thus far in 2024, well above the annual average in the decade prior to the pandemic of roughly $60 billion. Even when adjusted for inflation, this shows a concerted effort to move a percentage of foreign sourcing back to domestic levels of production, much of it spurred by concerns over trade wars.

The negotiations between port authorities and worker unions on the US East Coast have been tenuous over the past several weeks. In the wake of an agreement struck to end the strike in October, the parties are fast approaching a deadline near January 15th that could lead to another disruption in port throughput. The remaining issues are heavily focused on automation and robotics use at the ports, a sticking point that could be difficult to get past.
To head off potential disruptions and tariff risk that could arise in the first half of 2025, some purchasing and supply chain managers have been trying to get ahead of the potential slowdown by inbounding some Q1 merchandise early. Others may choose a different inbound route to avoid disruptions.

Two links are attached to this article, one for the ILA and one for the USMX information regarding negotiations. At the time of writing this month’s article, there were no new updates since talks broke off earlier in November.

The S&P Global Purchasing Managers Index for November came in at 49.7, just slightly below the midpoint reading of 50 (which signals the difference between expansion and contraction in the sector). Most importantly, there were some modest improvements in new orders in the survey results and optimism about the next 6 months has surged. This optimism is largely due to activity by the Federal Reserve to trim interest rates and promises for subsequent cuts in the coming quarters as it heads to its long-term target interest rate of 2.9%.

USMCA markets in general saw improvement in November. Mexico was in-line with the US with a reading of 49.9 (just marginally contracting) while Canada saw solid growth with a reading of 52.0 points, up from 51.1 last month. New orders for both were still slightly sluggish, which creates some uncertainty concerning the months ahead. But manufacturer optimism was also high in these markets with some of the best sentiment readings being hit in quite some time. Much of this, again, was tied to the US Federal Reserve outlook on interest rates and trimming in the quarters ahead. Some mentioned tariff risk as something that could create some headwinds for growth. But generally, the outlook was positive in the USMCA region.