Executive Summary
- In 2021 the pandemic stimulus created a demand surge pushing trade deficits far beyond historical levels. The trade imbalance created by tariffs has now eclipsed that demand surge.
- The impacts of the current administration's trade policies will begin to permeate through the economy in the coming quarters.
- We will see not only a hangover from demand being pulled forward by consumers, but also demand destruction from higher prices driven by tariff passthrough.
Trade data shows the pre-emptive tariff inventory build has eclipsed the pandemic stimulus demand-side surge in total systemic impact. As seen in the trade deficit data (blue line below), the tariff threat triggered a massive "bullwhip effect" — forcing a pull-forward of global trade volumes. Also included is producer prices final demand ex-energy (yellow line), which shows that as imports begin to normalize, producer prices rise reflecting tariff passthrough.
Importers are now being forced to restock due to depleted inventories, which continues to normalize the trade deficit. The FRED chart below shows private inventory levels pushed negative — which usually only occurs during a recession. One could speculate that private enterprises were hopeful the tariffs would be removed. The Supreme Court did rule against IEEPA Tariffs, which were immediately replaced with Section 122 tariffs. The hoped-for reprieve private businesses anticipated lasted only a weekend. We are entering a critical phase where the "inventory buffer" disappears. The resulting transition to post-tariff pricing will force a trade-off between higher retail prices and corporate earnings, likely triggering a defensive cooling in hiring and payrolls.
Consumer Front-Running: Vehicle Sales Surge
Consumers also responded to the highest tariff rates since Congress passed the Smoot-Hawley Tariff Act in 1930 [Smoot-Hawley — learn more →] with a surge in spending that pulled forward demand. This was most notably visible in total vehicle sales, as consumers anticipated higher prices on imported vehicles.
Chaos Theory Outlook
We are already seeing demand destruction occurring in consumer transactions. I expect this will continue to manifest in reduced consumer spending and a shift in purchasing patterns as the full effects of tariffs permeate the economy. The tax relief provided to the middle class through the One Big Beautiful Bill is being negated by blanketed tariffs — which function as a regressive tax [What is a regressive tax? →] that disproportionately impacts lower and middle-income households.