We wanted to address two topics that we are receiving client questions about:

1. What is the recession risk and what forecasts will change in relation to tariffs?
2. How are we approaching forecasting in a tariff environment?

Recession Risk and Changes in Forecasts Related to Tariffs

Our macroeconomic forecasts call for a non-recessionary outcome for the US economy despite the imposition of tariffs. Most of those forecasts were put in place prior to the tariffs being imposed, and while we are still analyzing the situation (and may adjust our macroeconomic outlooks if that analysis changes in the future), our analysis suggests that the recessionary risk is minimized by several factors:

1. Most of the key leading indicators are in general rising trends.
2. The labor market has been relatively resilient, with Real Personal Income up 2.0% in the three months through February compared to one year prior.
3. Industrial Production through March is normal and in range with our forecast.
4. Weekly datapoints (we are tracking a variety of daily and weekly economic datapoints, such as the US Weekly Economic Index, which is put out by the Fed and closely tracks US Real GDP) look solid.
5. The supply chain pressure right now is about average, with aggregate supply and aggregate demand roughly balanced (data through March).

The most likely outcome we see on a broader scale is that pricing will make up a greater contribution to the top line as the effects of tariffs trickle through, with volume taking up a lesser percentage of the top line. Even so, the effects can (and will) vary depending on a host of factors that I’ll delve into further below, so knowing your market(s) is key.

This is not to say we think that tariffs will have no effect on the macroeconomy. It is just that, thus far, the evidence points strongly against us issuing a COVID-19-style slash to our forecasts. The following are major forecasts that have either been revised recently or are in the process of being revised in at least no small part to tariffs:

• Oil Prices
• Wholesale Trade of Nondurable Goods
• Canada Industrial Production
• Mexico Industrial Production
• US Long-Term Bond Yields
• US Retail Sales

GDP in the first half of this year may be weak. This is particularly true for the second quarter, which is more likely to feel the brunt of the effects of the trade war, as demand pulled into the first quarter could potentially leave a hole in the second quarter. Other factors that could inhibit second quarter GDP include weak foreign tourism, stock market woes, economic uncertainty, and government cuts. We are awaiting the preliminary first quarter data in April, which is likely to be hurt by the surge in imports; however, the encouraging numbers in the US Weekly Economic Index, weekly retail sales, and other inputs are telling us that the economy is not coming to a standstill.

Forecasting Approach

We are taking a surgical, systematic approach to determining what forecasts need revisions and by how much, keeping in mind that our dive into forecasting during prior tariffs indicated that it is easy to overestimate the impact of tariffs. Factors that go into this:

• Our customary analysis of internal trends, leading indicators, long-term business cycle theory, and news/market observations (such as tariffs)
• The percentage of a particular market or company is exposed to imports, and where those imports are from
• The percentage of a particular market or company is exposed to exports, and where those exports are from
• Addressing the following questions:
  • Are the effects of tariffs offsetting (e.g. higher price and lower volume), or not?
  • How enduring are the effects of tariffs likely to be?
  • Does the market/company have a particular competitive advantage or disadvantage in a tariff environment?
  • Does financial instability or economic uncertainty play a role? If so, how much?
  • Are tariffs likely to be the driving factor or are economic fundamentals?

As always, we will take a data-dependent, apolitical approach to our forecasting. Please stay tuned. We share additional analysis as the tariff situation unfolds and update our analysis accordingly.