By Megan Leonhardt
Inauguration Day is more than two months away, but corporations are already anticipating a higher tariff environment and pre-emptively making moves that could affect economic growth in the next year.
During his presidential campaign, Donald Trump proposed implementing tariffs of up to 10% on all imports, and 60% on Chinese goods entering the U.S. While trade restrictions aren't new, Trump's tariff plan is in a separate league.
Economists have debated the inflationary impact of potential tariffs, but there are also business issues to consider. Some companies that import durable goods from China are preparing by pulling forward orders that might otherwise be affected by a new tariff regime, says Joe Brusuelas, chief economist at RSM. That could "juice" certain aspects of gross domestic product in the short term, he says.
Fashion brand Steven Madden told analysts this past week that the company, which has said just under half of its current business would potentially be subject to tariffs on Chinese imports, is moving ahead with plans to pull forward supplies and inventory. "We have been planning for a potential scenario in which we would have to move goods out of China more quickly," said CEO Edward Rosenfeld during Madden's Nov. 7 earnings call. "We are putting that plan into motion."
Home Depot, Honest Co., and Yeti also discussed in recent earnings calls contingency plans in place to address their potential exposure to tariffs.
"The most trade-exposed retailers and other sectors have been front-loading orders to mitigate the possible impact of coming Trump tariffs," says Brett House, a professor of professional practice in the economics division at Columbia Business School. "I've also seen clear efforts by a range of organizations to prefinance and roll over existing borrowing early to get ahead of the inflationary impact of these tariffs, fewer cuts from the Fed, and a further back-up in long-term yields."
This isn't an overreaction by businesses, says EY Chief Economist Gregory Daco, who expects to see tariffs rolled out much faster than in the first Trump administration. Policymakers know "exactly what they want to do and how they want to go about it," Daco says.
While it is too soon to see evidence in the macroeconomic data, the front-loading behavior, in particular, could help bolster the business fixed investment component of real GDP as soon as the fourth quarter, Brusuelas says. Business' mitigation strategies could also create short-term cash-flow issues and crimp margins.
Any change in orders also changes corporate inventories from quarter to quarter. If inventories rise in the fourth quarter by $100 billion, they would need to increase by at least that amount in the first quarter of next year to have a neutral impact on GDP growth, says Ryan Sweet, chief U.S. economist at Oxford Economics. If they rise by less in the first quarter, that will be a drag on GDP growth.
"All this front-loading of inventories that most likely will occur early next year is going to temporarily juice GDP growth, but then it's going to come out later in the year," Sweet says.
Private inventories fell 0.2% in the third quarter, according to the latest data from the Bureau of Economic Analysis.
Brusuelas expects real GDP to grow by 2.4% in the current quarter, reflecting some impact from companies pulling orders forward. Even the threat of large tariffs has the power to reshape behavior, he says.
The consensus forecast for fourth-quarter real GDP growth is 1.6% annualized, according to FactSet. The Atlanta Fed's GDPNow model estimate for real GDP growth in the period is 2.5%. The first estimate of fourth-quarter GDP growth will be released on Jan. 30, 2025.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 15, 2024 16:39 ET (21:39 GMT)
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