Moneybeat: The tariff drag

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JENNY ROUGH, HOST: Coming up next on The World and Everything in It:

The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning to you, David. 

DAVID BAHNSEN: Good morning, Nick, good to be with you.

EICHER: All right, David, you’ve heard the legal analysis there of the Supreme Court’s decision on President Trump’s tariffs. One of the analysts that we heard just a moment ago made the point that the president does have other options—same thing that you’ve said for quite awhile.

But right on cue … Treasury Secretary Scott Bessent was at the Economic Club of Dallas, this was just hours after the ruling on Friday, and he says that this changes very little—that the administration can pivot to other statutes and keep tariff revenue virtually “unchanged.” He points to two major sections of law, sections 232 and 301, to keep the tariff pressure on. 

So let’s listen to the Treasury Secretary: 

BESSENT: There are 232 and 301 tariffs that have withstood more than 4,000 lawsuits since the first Trump term. And then a number of 232 and section 301 tariff investigations will be started. Those take a number of weeks and months to implement. So I can tell you that the total amount of revenue that Treasury will collect this year will be little changed, if changed at all.

So if the revenue stays roughly the same, David, and the tariffs largely stay in place under different legal authority, does this ruling materially change the economics—or doesn't it?

BAHNSEN: Well, the very good news is that he is so wrong it’s almost comical. He’s right that the Supreme Court only ruled on the tariffs that have been rationalized by IEEPA, but that’s over 60% of the tariffs. So I say this is a very good thing for the administration, that the revenue that they are going to generate to the Treasury from tariffs is going to go down, and that’s before we get any clarity from the lower courts that the Supreme Court punted back to on refunds.

My best guess is that there’s a lot of companies that will not know how to fight it and how to go through the process, but that some of the more resourced ones will, and that they will end up prevailing, getting some money back. 

But it is true, the Supreme Court didn’t give perfect clarity on refunds, so let’s just go off of what we know, that over 60% of the tariffs now are called into question. And I’m not convinced that the administration wants to go put all of them back on, because I think that, as you’ve already seen over the last several months, with coffee, with sugar, with bananas, with household products, with kitchen appliances, they saw the affordability impact. They see that goods inflation is back up to 1.7%. It was 0% when Biden left office. 

So I don’t think that they want to fight a lot of this, but I definitely understand that the President and the Treasury Secretary need to maintain that public posture, either for politics and optics, or for negotiating with some of the other countries that are counterparties. 

But no, my view is very much that they will attempt to move some of the tariffs to other rationales, but there’s no way they can move all of it. No possible way.

EICHER: Well David, you said that the Supreme Court may have done the administration a favor in ruling against it, which sounds a bit counterintuitive. Not that the ruling is going to create economic growth—but you are saying that removing some of these tariffs may prevent further contraction. 

So please explain why you think that is. 

BAHNSEN: No, the Supreme Court ruling can't generate economic growth, but getting rid of an executive branch overreach can help stave off what was an economic contraction.

Here’s where it doesn’t help, though, is that there is still, because of the way that the White House has responded, the worst thing we have going right now in the economy is uncertainty, and there’s still now more uncertainty.

But right now, the ability to make commitments for hiring, the ability to make commitments for capital expenditures—my Dividend Cafe on Friday wrote extensively about how we have a capex-less society right now outside of data center—and that is not going to allow for the diversification for a fully robust economy.

And I think a big part of it, not all of it, but a big part of it is related to some of these tariffs and the uncertainty around them. So that’s what I mean by the Supreme Court doing them a favor, is these tariffs in particular are, I think, the worst from a policy standpoint, and to the extent that some of them can now go away or be punted or allowed to kind of fall off, it is going to enhance economic activity.

Any dollar that they don’t collect in tariffs now because of this, is a dollar circulating in the United States economy, in the private sector, available for capex, for hiring. 

So it’s one of the dangers, Nick—and I think you and I have talked about this for over a year now, almost on average every other week—we have a real problem talking about tariffs as revenue instead of talking about them as expenses.

EICHER: Well David, I want to call attention to something in this week’s Dividend Café, you made the point that I think is kind of easy to miss: that the tariffs are sometimes more damaging when they’re disinflationary—meaning when companies can’t pass along or don’t pass along the costs and instead absorb them. 

So help the listener out with that. Why can it be worse when businesses “eat” the tariff instead of passing it on?

BAHNSEN: Well, it’s a disinflationary drag. When a company can pass on the impacted tariffs, who doesn’t think that they would like that? Like there’s some company out there that says, I’m just going to be nice about this, when the customer will pick it up.

Now, likewise, when a customer won’t pick it up, when they don’t have pricing power, when they don’t want to sacrifice market share, it’s what we refer to as price inelasticity. When they can’t pass it on, no matter what the company does with the impact of tariff, they’re going to be operating in what they believe is their own self-interest.

So in some cases, the prices go higher, like we saw last year with coffee, with steel, aluminum. In other cases, they don’t, but then profit margins come down.

The disinflationary part is the latter part, that anytime someone says, "oh, they didn’t pass that on to the consumer, that’s good, they’re eating it." It’s not good that they’re eating it if it’s going to lead to less capital investment, less orders, less inventory, less confidence for the future, and most importantly, less hiring and less wage growth.

And so this is the study of history here, that tariffs become inflationary and then disinflationary, meaning at first you see some prices go up where they can go up, but then you see it go down if it puts downward pressure on total trade, capital flows, business investment, all of these other things.

The part that mixes this up in a confusing way is that nobody really knows the tariff policy, because of this executive discretion and all the waivers and carve-outs. And I can’t tell you how many people have said to me over the last six months, "well, I really thought it was going to be bad too, but when you look at Nvidia and Apple and the big cap stock market, they’re all doing pretty well. Maybe the tariffs haven’t been that bad." And I say, "They’re not paying them! It’s the small businesses that are paying them, and they clearly are not hiring." 

And yes, correlation is not causation in economics, but you saw a complete death of new hiring, a freeze of new hiring in businesses with less than 250 employees, and especially businesses with less than 50 employees right around the time the tariff uncertainty came in, and I believe it's causation. 

EICHER: Well David, let’s turn away from tariffs and turn toward GDP. We that report last week, the fourth quarter growth number, it came in at an annualized 1.4 percent. And even when you adjust for the government shutdown, that’s still a number that's softer than many had hoped.

You’ve made the point, David, that outside of data centers and AI construction, we’re seeing very little broad business investment.

So is this GDP report just evidence that growth is becoming too narrow and that we have a real have a capital expenditures problem?

BAHNSEN: I think the number would have been into the twos annualized—not on the quarter, but an annualized number for the quarter—if it weren’t for government shutdown. But even that would have led to a total GDP number that would have been in the high ones or low twos, far below what many were projecting and hoping, and far below the capacity of this U.S. economy.

And the part that was significantly compressed was capex, business investment. And then the hard part for that is that it’s not only hard in the quarter it’s reported, but it foreshadows what I expect to be difficulty going forward, because business investment is the fertilization of things that are going to lead to more consumption and activity in the future. And so it is the most important part of economic growth, is the supply side. Tariffs are not the only thing weighing on it, but it is a big factor, and the uncertainty around all of it is a big problem.

EICHER: Hey David, before we go, the Federal Reserve's most trusted inflation measure— personal consumption expenditures—that number has just come in, and the headline number looks like persistent inflation still. But your argument is that the composition bears a lot closer look than just the headline. What did you take away from it?

BAHNSEN: Yeah, you know, it’s funny, I wrote a Dividend Cafe saying disinflation is coming here this year, and you got a PCE print that ran a little bit hot. And yet my argument is a little bit more complicated than the headline suggests. 

Goods inflation is what’s gone up, and services inflation has actually come lower. And I believe you’re going to see it continue to go lower as the way that they’re pricing rent and rent expectations and stuff around the shelter side is going to keep coming down.

But I don’t think that the PCE thing is the White House’s concern. It’s really to my point that they need to get this economic growth narrative right, and there’s so much confusion right now on tariffs, it’s hard to do it, and a confused PCE number doesn’t help.

EICHER: All right. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. David, have a great week, we'll see you next time!

BAHNSEN: Thanks so much, Nick.

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