As summer starts to wrap up, I find myself looking forward to what’s next – cooler temps, longer sleeves, football, and shorter days. At least fall, or “Pumpkin Spice Season,” is somewhat predictable.
This month I want to share some of my thoughts and opinions about the upcoming economic season might be.
Several months ago, I wrote about the first 100 days of the current administration. I compared it to a house remodel, where the first step is to break stuff and tear out the old parts to make way for what’s next. Now that we see more of the trade deals being made, and the “BIG” bills being passed, we can start getting some idea of what the future shape might be.
My first observation is that the tariffs on our better trading partners are more like a value added tax (VAT) than a pure tariff. A VAT is a consumption tax on goods and services. In England, VAT is around 20%. Many of the U.S. manufactured goods are subject to VAT in England. A 15% U.S. tariff on imported goods to the U.S. is basically a reciprocal tax paid by importers to bring their goods to the U.S.
Based on what we have seen from inflation figures over the last two quarters, most of the tariff cost is currently not making its way to the consumer. This article from the Federal Reserve Bank of San Fransisco suggests that even 25% across-the-board tariffs would only impact consumer prices by 2.2%.
The much higher tariffs on our less-friendly trading partners appear to me to resemble sanctions more than a mere tax. More on that another day.
One of the things that has kept my attention for the last ten years has been government deficit spending and our growing national debt. If you live on a budget, you know it is best to live within your means. The longer you stretch and borrow, the harder it is to get control. It doesn’t take an IQ of 160 to know the U.S. needs to spend less and collect more revenue to get back in balance.
One thing tariffs seem to be doing is bringing in additional dollars to the treasury. And it seems to me a decent amount of it is being paid by those outside the U.S.
It’s tough to know in the middle of a remodel how it will all turn out. But regardless of what future economic seasons hold, we will continue to build well diversified portfolios that consider the challenges ahead.