Executive Summary
- In 2021 the pandemic stimulus created a demand surge pushing trade deficits far beyond historical levels. The trade imbalance created by tariffs have eclipsed that demand surge.
- The impacts of the current administration's trade policies will now begin to permeate through the economy.
- We will see not only a hangover from demand being pulled forward by consumers, but also demand destruction from higher prices due to tariffs.
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), the tariff threat triggered a massive "bullwhip effect", forcing a pull-forward of global trade volumes. Included within the chart below are producer prices final demand ex energy (Yellow Line). This data shows that as imports begin to normalize we can see producer prices rise reflecting the tariff passthrough.
This historic inventory surge served as a temporary bridge, deferring an inevitable market adjustment to the post-tariff price environment.
Importers are now being forced to restock due to depleted inventories which continues to normalize the trade deficit. See below, the FRED chart shows private inventory levels pushed negative which usually only happens during a recession. One could speculate that private enterprises were hopeful that the tariffs would be removed. The supreme court did rule against IEEPA Tariffs which were immeaditely replaced with section 122 tariffs. The hoped for tariff reprieve private businesses wanted only lasted for the 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.
Consumers also responded to the highest tariff rates since the Congress passed the Smoot-Hawley Tariff Act in 1930 [Smoot-Hawley click to learn more] with a surge in spending pulling forward demand. Most notably we saw this in total vehicle sales as consumers anticipated higher priced vehicles.
Chaos Theory Outlook
We are already seeing demand destruction occuring in consumer transactions. I expect that this will continue to manifest in reduced consumer spending and a shift in purchasing patterns as the full effects of tariffs are felt across the economy. The tax relief provided to the middle class through the One Big Beautiful Bill are being negated by increasing taxes using blanketed tariffs which are a regressive tax [What is a regressive tax?] .