A few weeks ago, we heard about how US ports were facing some sort of tariff-pocalypse. Fast-forward to today, and we’re hearing about how ports are having some of their best months on record. What’s going on? Is the economy about to crash, or is it booming? Simply put, the chaotic policy out of the White House is encouraging spending patterns that don’t match up with normal business logic. Let’s unpack it using some basic financial considerations.
How Inventory Management Works
All companies that deal with goods, whether retail or manufacturing, hold some sort of inventory at any given time. This is true for perishable goods like groceries, which companies can only stockpile in a limited fashion because they have specific expiration dates, as it is for hi-tech, just-in-time manufacturing, in which companies buy only the inventory they need to use at that moment in time. This could translate to 10% of a company’s budget, or it could translate to 40% of a company’s budget, depending on what type of product we’re talking about.
Beyond the type of inventory or the cost, though, the management methods also vary widely. Some businesses have extraordinarily sophisticated inventory management methods, relying on predictive analytics and constant monitoring of market trends, or a sort of procurement arbitrage (buying goods cheaper from one place rather than another at any given time), while others are more, like, “we’ll buy more when we need more.” (This last one is OK in a bull market, but it’s much harder in a more resource-constrained environment; one of my students wrote a paper on scheduling methods last semester and noted that it was surprising how many successful companies don’t actually use any method beyond, “shrug, I know how to do it”).
In other words? Inventory demands and management methods vary substantially across industries and across individual companies.
De-Normalization and The Cost of Chaos
Finance loves predictability. Most business folk would prefer taking a hit on overall profitability if it means higher predictability. The degree to which they’d easily give up one for another is certainly debatable. But normalized cash flows are a sort of holy grail for business. Think about this the next time you wonder why Menards’ 11% off sale seems to be happening all the time these days, or why plenty of companies offer discounts when you agree to a subscription contract instead of a one-time payment.
The problem is that the Trump Administration has been anything but predictable. Let’s recall the time that the USTR was testifying before Congress and appears to have learned during his testimony that the White House had changed tack.
So, the chaos factor is but one; price is another, and this is what’s causing most of the problems. Thus far, price increases from tariffs have, of course, affected consumers as well as small businesses. The administration insists– in a bizarre twist of reasoning or mental gymnastics- that the tariff is not a tax, but a tax cut, because of how much more we will be winning once all of the manufacturing is magically re-shored! A terrific fantasy, surely!
Ok, but what about the ports?!
We’re getting there. A lot of companies reportedly stockpiled inventory ahead of tariffs, whether in November 2024 or, really, any time before the tariffs were set to kick in this spring. (The dates have changed quite a bit based on who hurt his feelings and based on what late-night all-caps tweet goes out, etc.). So, this is resulting in skewing of economic data, the extent of which isn’t quite clear.
Preliminary analysis suggests that the current GDP numbers are going to be skewed to the pre-tariff part of the year– what Bloomberg has termed a “hangover” in especially the manufacturing sector. This means that we may see a second negative quarter of GDP growth (also known as a “recession”).
What is far more clear, though, is that companies are broadly raising prices to account for the tariffs. That will have inflationary effects on less elastic goods (goods where higher prices result in immediately lower demand), but in the longer-term, it’s more likely that it will just dampen economic productivity as people spend less. Is this a bad thing? For GDP growth, yes.
But it’s just as likely that Trump will renege and back down and then claim victory, as he did with China, magicking up a wild tariff number and then immediately lowering it to a number still far higher than what it was before. It’s anyone’s guess, but in the meantime, we’ve already seen huge, even if only temporary, dropoffs in shipping traffic that is still complicating port traffic and driving up costs in the near-term as importers scramble to beat the tariffs (that may or may not ever happen).
I’m not a betting man, but I can almost guarantee that we’re not any closer to a Golden Age than we were several months ago. If 70% of the economy is consumer spending and we’ve already seen weeks if not months of delays to major investments, production planning, and construction as a product of these tariffs? Tying up entire percentage points of the economy because of a chaotic “policy” is all but certain to have pretty serious negative effects, even if we don’t see them showing up exactly where we expect them to.
Hundreds of billions of dollars of market capitalization worth of some of the country’s largest companies have already suspended guidance for the rest of the year, accordingly. Translation? We have no idea what’s going on, and we’re not going to know for awhile.