CONSUMER BUYING PRICES

Tariffs are Simultaneously Alive and Dead

When applied to tariffs, Schrodinger’s Equation means that the tariffs are both alive and dead, like a Zombie. Bob Elliott from Substack and author of the Nonconsensous blog writes, "the administration has had room to swing back to a more aggressive policy stance on the trade war because so far the effects are not being felt significantly across the economy. But a big reason why there has been no impact here is simply because it's taking time to ramp up the prospective tariff collection, and that then is taking time to flow into the real economy given normal lags."

Here is a brief history of tariffs since Liberation Day. 

• April 2 - Liberation Day. Trump announces tariffs on every country in the world with no exceptions starting April 9. The reaction was swift. The stock markets crashed in the U.S. and worldwide. The VIX fear index skyrocketed with panic over inflation and a possible recession. Big box retailers feared their shelves would shortly be empty. U.S. car makers calculated that parts for new cars would either not be available or would cost substantially more.

• April 9 - Whoops. Trump declares a 90-day pause on implementing the tariffs on all countries except China, which now has a 145% tariff on all goods.

• April 13 - Trump exempted Chinese tariffs on smartphones, computers, laptops, memory cards, semiconductor devices, and flat panel displays. The tariffs at 145% would have more than doubled the price of those items.

• May 12 - Trump rolls back China’s 145% tariffs to 30%.

• July 9 - The 90-day pause is pushed again to August 1.

The good news is most of the bad stuff that was supposed to happen didn’t happen. The U.S. stock markets are at or near record highs. The economy has not collapsed. Inflation is relatively the same as it has been since the beginning of the year. Gas prices are down. Eggs are not $10 a dozen.

Very few tariff deals are in place. The dates for negotiations keep moving forward and are nowhere near completion. We live in a complex world and nothing happens quickly, especially these deals. For new readers, we call it VUCA - Volatility, Uncertainty, Complexity, and Ambiguity.

If the tariffs announced July 7 were to go into effect and remain in place, it would translate to a 17.6% average effective tariff rate on U.S. imports. That's up from 15.8% previously, up from 2.4% in January and is the highest rate since 1929 at the onset of the Great Depression.

Interestingly, in 1930 the U.S. passed the Smoot-Hawley Tariff Act in an effort to protect American farmers and industries by reducing imports and boosting jobs. However, the move triggered retaliatory tariffs from other nations, leading to a sharp decline in global trade and worsening the economic downturn. Could history be repeating itself?

According to the Yale Budget Lab, “if sustained, the tariffs would translate to a 1.7% rise in consumer prices, costing the average household $2,300 per year.” Like so many other announced tariff threats, they rarely happen without negotiations and reductions.

Despite what Trump says about “no exceptions” or other absolute statements, his policies are almost always changing and adapting. Are we out of the woods? Not yet, but we are far better off.

INFLATION

Inflation remains tame despite tariffs

Inflation has been 2.3% over the last year based on the Fed’s preferred measure, PCE or Personal Consumption Expenditures. Along with low unemployment rates of 4.1%, the Fed sees no reason to drop interest rates now. If inflation remains low over the near term, we may see some small drops in September or later.  

• The Consumer Price Index (CPI) for June rose 0.2%. Year over year it is up a modest 2.3%.

• Core inflation for June rose 0.2%. The annual rate for the year in 2.8%.

• Personal Consumption Expenditures, PCE, the Fed’s preferred inflation measure rose by 2.3% over the 12 months through May, up from 2.1% a month earlier, while the twelve-month change increased to 2.3% from a 2.1% reading last month. Excluding the volatile food and energy categories, core PCE inflation was 2.7%, compared with 2.6% in April. They are up 2.7% over last year.

• The Producer Price Index for May core prices only rose 0.1% and is up 3.0% for the year. June will be reported on July 16. 

MANUFACTURING

Tariff uncertainty is starting to show up

The Manufacturing PMI® ISM rose slightly in June to 49.0 from 48.5 in May and is still in contraction. A Manufacturing PMI® above 42.3 percent, over a period of time, generally indicates an expansion of the overall economy. New Orders fell slightly while Production rose to 50.3 from 45.4. The Price Index rose again slightly to 69.7, which is high by historical standards, but below post COVID inflation levels. 

• U.S. non-defense capital goods new orders, excluding aircraft, rose 0.5% and up from 0.2% in April.

• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, also rose 0.5% in May after falling 0.1% in April.

• Construction spending declined 0.3% in May, as a drop in homebuilding led to most other declining categories. This is down 3.5% in total spending from last year.

• Car and light truck sales were sold at a 15.3 million annual rate in June, down from 15.6 million annual rate in May. This is slightly ahead of last year.

• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our nine locations and a diverse industrial base. Based on our twelve-month trailing average, volumes for June did not change.

CHINA

China lumbers along

The official June PMI rose slightly to 49.7 from 49.0 and still remains in contraction. The Caixin unofficial PMI rose to 50.4 in June from 48.3 in May, exceeding expectations and is now in growth territory.

China’s low consumers’ confidence continues to persist because of the housing crisis. Most Chinese have a large percent of individual wealth tied up in homes that are far below what they paid for them and few buyers. Also, improvement in job prospects and income growth has been limited due to the government’s ineffective stimulus policies over the last two years.

CPI is negative 0.5% year over year. China's producer prices fell the most in nearly two years, with the producer price index falling 3.6% from a year earlier. Global trade headwinds continue to hurt export-heavy sectors even though manufacturing prices for computers, communications and other electronic equipment accelerated from the previous month. The 30% tariffs are also hurting their economy.

Electric vehicles, AI and data centers will consume vast quantities of electricity in the next 10 years. China consumes approximately twice the electricity as the U.S. does now. Projections indicate that by 2035, China's electricity demand will be six times that of the United States. China has shifted its electric needs away from coal toward renewable sources such as hydro, solar, wind and battery sources, which are easier, cheaper and quicker to build and reduces greenhouse gas emissions.

Edward Meir of Marex has determined that “China’s green and renewable sectors (along with rumored government stockpiling) are not only making up for weaknesses we are seeing in manufacturing and real estate but also seem to provide a better explanation for why metals have held up so well.”

The recently passed One Big Beautiful Bill Act will significantly reduce the tax credits for wind and solar energy projects here in the U.S. that were established under the 2022 Inflation Reduction Act (IRA). The IRA had spurred job creation and supported manufacturers in the clean energy sector, while aiming to cut greenhouse gas emissions and promote a more sustainable energy future.

METALS

Copper fireworks went off July 8th

Last month it was aluminum that spiked on Trump’s Canada tariff hikes. This month it is copper. At a news conference July 8, Trump was asked about tariffs on copper, and his answer was 50%. Most of our copper is imported from Chile and the U.S. ran a trade surplus of $1.8 billion in 2024. This sounded like a case of “ready, fire, aim.” This tariff may take place at the end of this month or August 1. You just never know.  

CME copper spiked up almost $.50 a pound. Meanwhile scrap copper consumers continue to widen the discounts for scrap because they don’t expect the tariff will hold. Even though CME copper was up $.60 this month, #2 copper is up only $.14. 

Similar to the run up in prime copper, scrap aluminum prices have not followed suit. While spot prime aluminum prices rose $.27 from the start of June to the start of July, the average segregated prices are up $.105. The other prime grades are flat, and the painted prices were down $.05. Aero grade turnings fell .03 while other secondary grades were similar to June. Stainless prices fell slightly while steel prices were the same.

CLOSING

Tariff negotiations continue. Trump’s April 2 “90 tariff deals in 90 days” promise hasn’t come to fruition. So far only the UK and Vietnam have settled. We know that things change rapidly with Trump and more surprises are yet to come. Stay tuned.

“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty. ” - Tacitus

"Life is good. Family and health are precious." 

Bruce Shapiro