Well, let's see what our next guest has in his model. Seth Carpenter joins us here in studio two, chief global economists at Morgan Stanley. All right, set the question that I'm sure you're being asked repeatedly today, how should we look at economic growth and the potential impact based on these tarift's assuming Trump goes through with them.
Yeah, well, I mean, I think the last part of your question is absolutely key, assuming he goes through with it. So we put out a piece a bunch of colleagues and research coming into Asia open for Monday, and it was let's game out three different scenarios for what might happen if it's mostly a headfake, if the tariffs go on and then they come off after a fairly short period of time, and then if they're there for the duration.
And we tried to think through all the different scenarios because guess what happened over the news flow of this morning. We saw the announcement about the delay and the tariffs from Mexico by something like a month. That seems like it should leave open the door for further discussions, further negotiations, and so maybe we really are And so the short answer is you have to start with the way you
ended that with, assuming they go on. But what we said is, you know, a range of views, lots of uncertainties, but it could be a percentage pointer more off of growth this year. And remember we're coming into this year with a pretty strong growth rate in the economy, the economy in solid places. We thought it would slow down because we thought tariffs on China would gradually ramp up
over time. If we get this front loaded, really aggressive tariffs on two of our big trade partners, you could be talking about a percentage point and possibly more.
I know, it's hard to model that side of it, which is probably the more hard number that you would use. I am curious just about the uncertainty and how that could potentially affect economic activity because let's say he does it, then he removes him, or he reduces them, and or
he raises them. Is this something that companies, manufacturers, consumers for that matter, can sort of sort out for themselves over however long this goes on, or did they just sort of retreat and say we're just not going to do anything.
Yeah, I think some of all of the above. I don't think you can ignore the uncertainty and has to be relevant. When I talk to our core clients one of the things that they do worry about is where could we be wrong? Where is the uncertainty, and so that's clearly part of it. We got recently last week data on international trade. We saw a big increase in
imports to the US in December. Some of that almost surely is reflection people trying to front run possible terists because they didn't know what was going to go on, So it has to matter. But then the economist in me who plays with data says, let's see if we can find some really good empirical measures, and it's really hard to get everything to be consistent, to get a
clear reading. And quite honestly, this kind of uncertainty where it's literally the President of the United States who gets to be the final decider, we don't have a lot of experience. We saw this in twenty seventeen, twenty eighteen, twenty nineteen, but it's not as though we have a dozen episodes where we can draw lessons.
And the difference between that last period is the FED was hiking up cutting, so right now you're looking at a little over forty basis points now priced him for the rest of the year. Does this stay the Fed's hand.
I mean, I think that's another key question. So we've been of the sort of dubbish side of things because we see inflation really trending down so far before any tariffs get put in place. And it does seem like, including from Chair Powell's last press conference, that as long as there's clear and convincing evidence that inflation is trending down, they'll be willing to very cautiously nudge down the policy
rates and more. And it's a very important bud. At the December of MC meeting, when they filled out their surveys about their own economic projections, they said risks to inflation are skewed to the upside. I think those risks have been reinforced by the prospect of tariffs coming in maybe sooner than people thought, and the data seem to suggest that inflation does pick up after two or three
months after tariffs are imposed. The Fed will believe they'll have their starting point being that the inflation effects will be temporary, that it'll be a level shift higher in prices. But boy, again the contrast to twenty eighteen, they were raising rates very cautiously, but they were also coming off of a decade where they couldn't get inflation up to their two percent inflation through it different absolutely opposite situation here where they're worried about will things keep coming down?
So they have no comfort. They can take no comfort from the idea that it should be temporary.
Something that has held up is the labor market. Does the tariff whip saw affect business sentiment and then affect hiring or non firing or temp workers.
I think it absolutely can. But before we even get to the uncertainty side of things, the tariffs themselves, and I think this point is underappreciated if we look back to twenty eighteen and nineteen. Remember we import a lot of goods into the United States, but they're not all finished consumer goods where it's just a tax on consumers. To be sure, that's a huge part of it. When we have finished goods coming in, you put a tariff
on it. It's a tax on consumption, full stop. But we also import a lot of intermediate goods, capital goods, so tariffs are also a tax on domestic capec spending. Tariffs are also a tax on domestic man manufacturing because you're taking in components and doing final assembly here. So what happened in twenty eighteen and twenty nineteen. Industrial output fell in twenty eighteen in the second half, and it kept
falling in twenty nineteen. Manufacturing employment was rising pretty strongly in twenty sixteen and twenty seventeen, flattened out in twenty eighteen, and then fell in twenty nineteen. I do think there's a material downside risk to the employment picture here. And again we're coming off of twenty twenty four where the economy was just rock solid.
But is that just on the manufacturing side. I mean, we know manufacturing is, at least in terms of employment and even in terms of economic contribution, is a little bit smaller or significantly smaller than what we see on the services side. Is there a potential impact on the services side of the economy.
Yeah, So anytime we see one part of the economy start to slow down, it tends to have a ripple effect and starts to affect other parts of the economy. So as the tariffs that are on consumer goods, that tax on consumer spending, they'll be less spending and my spending that somebody else is in and so I think that matters for just the broader economy. And similarly, people who might lose their job in manufacturing, well, they go out to dinner, they go to see movies, they go
to hotels, and so they're reduced. Spending transmits itself across the economy as well. So this really is an economy wide phenomenon. I think the first wave will be much more localized where you can see the hit from the tariffs, but then it starts to spread out. That's just the nature of what an economy does.
When we talk about the goods affected at least and the stuff that consumers are going to be keen to, we also talk about agricultural products. Obviously, avocados could have an impact on certain retail on certain restaurant chains. You have things like apparel obviously that could have a huge
impact on certain retail chains. Then there's this whole issue and it kind of gets a little bit into the weeds, but it has to do with the e commerce and that deminimous rule that's basically been a place since like the late thirties or forties. I believe will that have a material impact on our economic activity or is that more of an impact on the Sian's and the tea moves over there in China.
I mean, I think that's my guess. We've been trying to again game out lots of different scenarios and say at a little bit of a higher level, and so they're going to be The one thing I can guarantee you is that we're going to be surprised in some corner of the world because we are in such an integrated economy globally. We have seen some polls sort of the so called multipolar world where things are spreading out.
But I am absolutely sure we're going to get surprised because there's going to be a connection that we just can't anticipate.
Who gets it worse. I mean, assuming Trump goes to it, is it China? Is it the US? Is it Mexico? It's a Canada.
I think it's a little bit of all the above. What we said in the note we just put out coming into as open for Monday was that if we really went forward and the tariff stock Mexico probably would go into recession. That's a really high probability event the US because we're coming off of such a strong starting point. That percentage point or so off of growth probably is not enough to tip the US into into recession. And I have to say economies like Mexico have a much
more challenging time. So if you think about the central bank there, Mahiko, they have seen their currency weakend with the threats of tariffs in the air. Then the announcement of them made it go even more. So they have to worry about can we lower the interest rate to support the real economy. Well, no, because there's a risk that the currency gets even weaker, which then drives up domestic inflation war So they're really caught between a rock and a hard place.
All right, Well said, I have to leave it there. Speaking to currencies, we're going to come back after the break with the deeper dive into the FX moves. Our thanks there to Seth Carpenter. Global economists over at more Instantly