00:00Small business optimism bouncing back slightly in May.
00:03Business owners still feeling the heat, with nearly a fifth citing taxes as their most single important problem.
00:08We're going to get fuller picture from consumer price data tomorrow.
00:11I want to bring in Michael Ferroli, chief U.S. economist, over at J.P. Morgan.
00:15All right, Michael, we can get tomorrow.
00:17So we're looking for the same numbers consensus, two-tenths headline, three-tenths core.
00:21So we don't think we're yet going to see the biggest impacts of tariff pass-through.
00:26We think that's probably more a June-July story.
00:30But, you know, that's why they play the game, right?
00:32So if we get that consensus number, is that a dovish number?
00:35Is that a hawkish number?
00:36Is that a Goldilocks number?
00:38I think it's a number that doesn't really change next week for the Fed.
00:41You know, the Fed has been very consistent in saying they want to wait and see what's going to happen here with the tariffs,
00:46how it impacts the economy.
00:47I think if we get something like we in consensus are looking for, it's not going to tell you anything too decisive just yet,
00:53nor would I expect it that early.
00:55Well, that's what I'm curious about.
00:56Like, when does it tell us something?
00:57And, I mean, as an economist, I mean, is inflation typically a ramp-up or is it kind of a shock that just kind of appears one day?
01:04Yeah.
01:04So the evidence from the 2018-19 tariffs was that most firms passed it through within two, three, four months.
01:11So that's what we're kind of expecting this time.
01:13And there's actually been some survey evidence from both the New York and Atlanta Fed suggesting that's probably the time frame to look for.
01:19So that's why, again, we could see something tomorrow, but probably more likely a little later in the summer.
01:24And it was interesting we had the NFIB small business data today, optimism up, but they also pointed out in that report that the largest share of folks in that survey are anticipating that they're going to raise prices over the next three months.
01:37So that would at least lend some credence to maybe that we could see some elevation, right, going forward.
01:41Yeah, I think we're seeing that in a lot of surveys.
01:43So that's a pretty firm expectation of ours now.
01:46We have seen surprises, though, for inflation in Europe and the U.K.
01:50Yeah.
01:50Is there a difference between us and them when it comes to?
01:53Well, they're not imposing tariffs, right, by and large.
01:56So that I think is the biggest difference.
01:57Sure, they kind of are in response to, right?
01:59Yeah, we haven't seen that much in the way of retaliatory tariffs quite yet.
02:03So, but that's certainly not something we could rule out down the line.
02:07But right now, I think we're looking at a pretty different picture between the U.S. and a lot of its trading partners.
02:11What about PPI?
02:13So what was so interesting was, I know you're going to talk about companies, but smockers coming in and talking about how much they were getting hit by price increases, by tariffs, but also by coffee prices, et cetera.
02:23Do you think we're going to see a real disparity between PPI and CPI?
02:27So PPI could get affected in two ways.
02:29One is the imported inputs that a lot of producers are using.
02:33The other is that some producers, domestic producers, may see this as an opportunity to raise prices if their competitors from overseas are also having their,
02:41costs go up.
02:42So we certainly saw that, again, going back to the 2018 tariff, trade wars then, when we imposed tariffs on washing machines.
02:51Domestic washing machine prices also went up.
02:53So that's something I think we could, you know, watch out for in the PPIs.
02:56I am curious also about kind of the one-two punch of what's been going on with tariffs and now this tax and spend bill that's working its way through the Senate.
03:04There are a lot of provisions in there that could potentially be revised.
03:07But there are two big ones in there, obviously one having to do with the fact that the tax cuts aren't necessarily paid for.
03:13And also this provision that is effectively going to end up being kind of a tax on outside capital.
03:18And there's been a lot of discussion here about that that could have a major economic impact on the U.S.
03:24Can you explain that?
03:25Yes, certainly.
03:26So it's a section 899, which basically imposes taxes on foreigners who own or are receiving U.S. source income.
03:34And we think economically that should raise the cost of capital for firms that rely on outside foreign capital.
03:42So that could be a headwind to investment here in the U.S.
03:45In addition, we do think it probably is, you know, weighing on the dollar, or could weigh on the dollar and put upward pressure on interest rates.
03:53So it could also affect the economy through its effect on financial conditions.
03:56But definitely something we're keeping a close eye on.
03:58Is that going to be material, though?
03:59And I mean, because when I read about that, I think, OK, this seems like it's just kind of like something relatively minor.
04:05Yes, it has an impact, but we're not going to see like a big drop in GDP or economic activity because of it, are we?
04:10Right.
04:10I don't think so, right?
04:11Because at least initially it's going to be 5 percent and then potentially ramp up to 20 percent.
04:17And it's on a subset of countries, right?
04:19It's countries that have taxes that we think are unfair, like digital sales tax and so forth.
04:24So it just depends on the scale.
04:26But certainly you can envision scenarios where, in the worst case, it actually would have an impact.
04:32And I think there's also sentiment channels here that we have to think about if foreign capital flees en masse from the U.S., that would be, which is not what we're expecting by any means.
04:42But, you know, I think that's a channel where you could see more of a larger impact than what we think is the most reasonable case.
04:48I think I asked you this last time.
04:50How hard is your job right now?
04:52Like how often and quickly do you need to redo your models based on all the ifs that we just talked about for six minutes?
04:58Yeah, we're getting used to it.
05:00You know, it's been a couple of months now.
05:01And so I think there's a and I think we've also feels like we slowed down the pace at which tariffs are being revised.
05:08You know, we obviously have this big, beautiful bill making its way through Congress.
05:13And when that, you know, we'll see the final shape of that.
05:16We're not expecting to see anything in the next few days.
05:18So I don't expect an imminent revision there.
05:20But there's definitely a lot going on right now.
05:23How do you model, say, deficits and the impact of deficits on future growth based on what we know in that bill?
05:30Yeah.
05:31So, you know, I think the primary impact of higher deficits and debt is that it is crowding out private capital.
05:37In other words, it's raising interest rates to attract buyers of this debt.
05:41And that in turn raises the cost of capital for private companies and therefore could discourage investments.
05:47I think that's the primary channel that we're looking at.
05:50And I think we see it in the behavior of the long end of the curve and things like term premia.
05:56So I do think it's already, you know, somewhat in the price.
05:59And one of the things that is, you know, weighing on the housing market to name other areas.
06:04I'm just real quickly, though.
06:05I mean, particularly when it comes to what we're seeing in the Treasury market.
06:07And there's been a lot of discussion about what's happening with the longer end of the curve, whether there's a real buyer strike.
06:12There was an interesting note out today by I think it was maybe Morgan Stanley or BNP Paribas to kind of talk about the idea that
06:17don't necessarily expect an increase in that term premium on the longer end because a lot of the worst case scenarios,
06:23at least from a fiscal standpoint, are already priced in.
06:26Yeah.
06:26Look, I mean, I think what we all know what's happening in Washington.
06:30It should be in the price.
06:31Yeah.
06:31But, of course, you know, we could get worse news on on the deficit.
06:36Right.
06:36I mean, those projections don't assume any recessions, any wars, any of the things that usually really add to deficit.
06:43Just real quickly.
06:44But this gets to Alex's point, too, about how difficult your job is.
06:47How much can you rely on those projections coming out of Washington, whether it's out of the White House or even the CBO, which is supposed to be nonpartisan?
06:53Yeah.
06:53A lot of people are looking at these numbers and now and these projections are lack thereof and saying, I don't buy it.
06:58So I think the CBO is a pretty honest scorekeeper.
07:02Yeah.
07:02They are constrained by certain rules and what they can assume and not assume.
07:05You can adjust for that.
07:07But I do think the CBO's numbers, once you understand their limitations, are a good starting point.
07:12And, you know, you have to start with something.
07:13Right.
07:13You can't just, you know, throw up your hands.
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