Chief Economist Eugenio J. Alemán discusses current economic conditions.
We were in the camp that the new administration was using the threat of tariffs as an instrument to negotiate deals with other countries, especially with our largest trading partners, Canada and Mexico. However, that no longer seems to be the case, as President Trump announced a 25% tariff on all automobile imports starting April 3 and a 25% tariff on automotive parts starting May 2. These changes, which will remain in flux for several more months make it difficult to know the final effects of these measures. However, what is sure is that the uncertainty will remain with us for a bit longer and the costs of the tariffs will continue to increase.
We have stressed over the last several months that such high uncertainty is not good for economic activity. Consumers have been letting the administration know that they are not happy with these levels of uncertainty by responding to consumer confidence and sentiment surveys, which have dropped back to levels that existed before the presidential election. At the same time, there is a high probability that the uncertainty regarding tariffs has made consumers change their behavior. We have heard that people planning to buy a car later in the year have decided to buy the car today to avoid the extra costs expected by the increase in tariffs, etc. These ‘forced’ changes in behavior are, typically, not positive for economic activity because they push consumption forward and have the potential to reduce consumption in the future, especially for durable goods.
For firms, the high uncertainty environment is bad as many firms are scrambling to make the adjustments necessary for their businesses to remain competitive, to manage their inventory levels, to plan ahead, etc. For example, the February NFIB Small Business Survey showed a decline in seven of the ten components of the index compared to January due to increased uncertainty about the future. Still, business confidence seems to be in better shape than consumer confidence today, but the longer such high levels of uncertainty linger, the higher the probability that it creates increased stress in the economy.
The increase in automobiles and automobile parts tariffs will hurt Americans in general but it will hurt those that are struggling economically and financially even more. As we have said in the past, American auto manufacturers decided a long time ago that they were not competitive nor profitable in producing small cars/sedans and decided to specialize in the production of light trucks (See our previous reports for May 24, 2024; February 7, 2025; and February 25, 2025), whose production has been protected with a 25% tariff since the 1960s. Thus, they have been importing cheaper/smaller cars and typically produce high-end light trucks in the US. However, the imposition of tariffs on small cars/sedans imports, even from Canada and Mexico, will increase the average price of small cars/sedans considerably, hitting lower-income Americans the most.
Since we no longer produce small cars, the new tariffs will have an immediate impact and while there have been reports that President Trump has asked automobile companies to refrain from increasing prices by using tariffs as an argument, it will be very difficult for them to do that if they want to remain in business. One of the arguments for tariffs used by the Trump administration is that they want automobile companies to increase domestic production. However, as we have argued before, this will need billions of dollars in new investments and could take from five to ten years. During this time, automobile companies will have to be able to raise capital for these new investments and they cannot do it if their businesses are losing money because they cannot raise prices to take into account tariffs.
Furthermore, the auto loan market is already on high alert. Delinquency rates on auto loans, as well as credit cards, have been on the rise for a while and are approaching levels not seen since the Great Recession. An increase in the price of cars is going to put even more stress on the automobile sector and the automobile lending market, as it will tend to reduce the number of potential buyers.
Due to the recent changes in the administration’s policies regarding tariffs, we have further revised our forecast for economic growth this year from 2.0% to 1.8% as it seems that tariffs against Canada and Mexico are going to be higher than we had expected. We have also made changes to our inflation forecast to take into consideration these new developments.
Economic and market conditions are subject to change.
Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.
The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.
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