Transcription
Controversial new tariffs are set to take effect this week, with some economists warning of a potential economic slowdown. The economy is slowing down. Companies are slowing down investment.
Remember, a tariff is a tax. What they forget is a tariff is a wedge between buyers and sellers, producers and consumers. And the more wedge you have, the more it's going to hurt the economy.
Take a look at this chart. It shows us that the world changed at the start of 2025. Global trade, that had once been one of the most stable economic variables of the financial system, all of a sudden became unstable and a source of stress for the economy. Since the start of 2025, the US job market has now weakened to the lowest level since the pandemic. Job growth in the US has essentially come to a standstill over the course of the last 3 months. It's safe to say that a lot of this slowdown can be attributed to the new tariff policies that are being implemented. But the question is whether these policies are about to push the labor market over the edge and into contraction.
Currently, the EU, Japan, and South Korea now face a 15% tariff rate, but other major economies like Canada and India face up to a 50% tariff rate today, and China's tariff rate potentially being worse depending on negotiation. All of this takes the average effective tariff rate in the US to around 18%, the highest level since the Great Depression.
But the real impact that all of this is going to have on the economy really depends on how businesses respond to these tariffs. Are corporations just passing along this added cost of tariffs onto the already weak US consumer? Are they simply able to absorb the cost of tariffs by slightly shrinking their profit margins? Or are corporations instead resorting to cutting costs in other parts of their business to make up for these tariffs, which could end up resulting in layoffs?
Let's look at the data. Roughly 30% of manufacturing firms and 45% of service firms in the US are reporting that they're passing 100% of the tariff costs on to the consumer. On the other side of the spectrum, only about 20% of US firms are reporting that they're not passing on any of the tariff costs onto the consumer. So, in other words, we can say that most businesses are passing through the added costs of tariff onto their products and services that are purchased by consumers. And what is very interesting is that most firms have reported passing on these added costs within 1 to 3 months, with some businesses passing on the cost the very same day or within a week. Very few businesses are saying that they're waiting more than 6 months in order to adapt their prices. So, what these two data sets are saying is that not only are businesses passing on the cost of tariffs to the consumer, but it seems that they have likely already done so. In other words, it's very likely that tariffs are already reflected in consumer prices this very day.
The US consumer price index did tick up slightly for the month of July, but overall, despite all of the very gloomy projections by economists, it seems the overall impact of tariffs on consumer prices has actually been very tame. In fact, we can see a clear divergence right now between the costs that businesses are facing as a result of tariffs, which we can see from this survey right here, which generally tracks consumer prices, and the current rate of inflation in the US. Now, government numbers like the CPI can be slightly lagged. So, we could see the inflation data tick up a little bit further in the next few readings, but overall, it seems there's something else at play here that's creating this divergence. And I can show you exactly what that is.
If I add the data set that shows us housing inflation in the US, there's something quite crazy that's happening. Rent inflation in the US is at the lowest level of the last 20 years of data. This is using data from the Cleveland Fed. So, the big slowdown that has been happening in the housing market over the last year has very likely been completely offsetting the impact on the consumer price index from tariffs. Remember, housing inflation is one of the largest components of the CPI.
Now, finally, the other huge factor that's at play here is the fact that gasoline prices, that you see here, have continued to trend down over the course of the last year, which has also helped to keep inflation anchored over the last few months. While energy is a smaller part of the consumer price index, it is incredibly volatile, which makes it have a significant impact on the direction of inflation, as you can see from the tight correlation between gasoline prices and the consumer price index. So, cut a long story short, tariffs may be raising the price of consumer goods. But on the flip side, we have both shelter and energy inflation that are two factors that have a significant weight on the CPI that are putting downwards pressure on it. You put all of these together and you get a consumer price index that has been relatively stable, despite the impact of tariffs, which has partly shielded the consumer.
Now, by this point in the video, you might be confused. If the consumer really has been shielded from tariffs, then why has job growth in the US slowed to a standstill? And why has GDP growth in the US slowed from roughly 3% in late 2024 to now 2% just a few months later? Well, there's a second big narrative that's at play when it comes to tariffs, and that is that it's forcing businesses to cut costs and lay off workers, which is weakening the job market and slowing growth down. And this is where many economists are still painting very gloomy outlooks, projecting that layoffs should soon start to pick up, and that GDP growth should soon turn negative.
So, again, let's take a look at the data. This scary chart here gives us the number of S&P 500 companies that are mentioning the word tariffs in their earnings call. This has, of course, skyrocketed in recent months, meaning the largest 500 companies in the United States are clearly seeing their earnings impacted in some shape or form by tariffs. When we look a little bit deeper, we see that roughly 40% of US companies are reporting that their net income has somewhat declined as a result of tariffs, as opposed to only 5% of businesses reporting that their earnings have been significantly impacted by tariffs. This is according to a survey from the Federal Reserve Bank of New York. And the same survey tells us that roughly 10% of businesses reported that tariffs had somewhat of an impact on the number of workers they employed, and almost none reporting that tariffs had a significant impact on their employment. So, although the impact of tariffs on US company earnings is clearly widespread across the United States, the actual material impact on earnings and employment seems to be relatively muted.
Our takeaway from all this is that the slowdown in the labor market in 2025 and the slowdown in GDP growth are not actually a direct result of tariffs themselves, but instead a result of the uncertainty around trade that has come as a result of the tariffs. When trade uncertainty spiked on Liberation Day, many companies completely froze hiring as they had no idea what to expect next. New deals between corporations were also put to a halt in many cases. And not to mention that the stock market declined by 20% in the immediate aftermath of the tariff announcements. All of these are factors that likely contributed to growth slowing down.
Now, although uncertainty around trade is still quite high relative to history and could still be dragging down growth, it has been coming down quite quickly and in a steady manner since April. Now, some of you might call us too optimistic, but we think we may be seeing the light at the end of the tunnel. For example, according to the NFIB, small businesses are reporting that now is a better moment to expand operations than at any other point in the last 5 years. Typically, these types of jumps in small business optimism occur in the middle of economic cycles, not heading into recessions. Heading into the last four economic recessions, small businesses were getting gradually less and less optimistic.
Our job as traders is to stay objective regarding the data that is in front of us. And a lot of it right now is pointing to the fact that the slowdown in growth could prove temporary. And so, essentially confirming the price action that we've seen on the S&P 500 over the course of the last few months, that has been able to stage a massive recovery and seeing its long-term momentum pick back up.
Now, we've had exposure to several leading stocks at BravosResearch.com that are currently up double digits just in the last few weeks, including Google and a stock called AEM that we both just closed for 20% profit. Although the market has been slowly grinding upwards since about late July, there have been countless opportunities to generate larger returns across financial markets. We think at least for the next few months, we're going to remain in this kind of environment as the broad market continues to trend upwards into the end of 2025. The trades we posted on bralesearch.com in 2024 allowed us to beat the market by quite a large margin, and it seems we're getting back into the same rhythm, the same environment right now in 2025. We take our members through our trading strategy step by step on the private videos that we post on our website and share with you every single one of our trades. If you're interested, you can click on the link down below and subscribe to our service. Thank you for watching.