There’s significant debate among Americans right now. One camp thinks that tariffs will be the magic bullet to resurrect U.S. manufacturing dominance. The other camp sees tariffs as a misguided gambit likely to send the U.S. into stagflation.
Reality, like most things, likely lies in the middle. Some industries, such as semiconductors, could benefit from reshoring, while others, such as the paper and apparel industries, may never recapture lost jobs.
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Meanwhile, the tariff scheme poses big risks to an economy that is already showing signs of strain.
The situation isn’t lost on long-time market participant Jim Cramer. Cramer famously lambasted the Federal Reserve during the Great Recession, and recently, he weighed in on tariffs, delivering a blunt take on what could happen next.
The U.S. economy is stuck between a rock and a hard place
The Federal Reserve told us that inflation was transitory in 2021. They were wrong. Very wrong. In 2022, they ate crow and embarked on the most hawkish monetary policy since Fed Chair Paul Volcker broke inflation back in the 1980s.
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Higher interest rates successfully wrestled inflation down below 3% from 8% in 2022, allowing the Fed to switch gears to rate cuts last fall. However, prices have been creeping higher, putting pressure on already cash-strapped consumers.
The Consumer Price Index showed inflation at 2.8% in February, up from 2.4% last September.
That’s far from the only worrisome sign. We’ve also seen the unemployment rate tick up to 4.1% from 3.5% as recently as 2023. A total of 172,017 people lost their jobs in February, according to Challenger, Gray & Christmas, the most in the month of February since 2009.
The drumbeat of inflation and a weaker economy have damaged consumer confidence, which is key to economic growth.
The Conference Board’s latest Consumer Confidence Expectations Index, which measures consumers’ short-term outlook for income, business, and labor market conditions, fell 9.6 points to 65.2. That is the lowest reading in 12 years and south of the threshold of 80, which usually signals a recession ahead.
The prospect of frustrated consumers retrenching because of higher prices and job uncertainty isn’t a winning recipe for corporate profits. And that’s not great news for stocks. The S&P 500 tumbled 4.6% in the first quarter, which is the worst showing since a 4.9% drop in the first quarter of 2022 preceded a bear market.
Jim Cramer takes issue with across the board tariffs
There’s chatter that when President Trump installs reciprocal tariffs, he may place a mostly across-the-board 20% tax on imports.
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The impact of such a tariff could be positive for manufacturing. Still, much of the manufacturing capacity has long ago been offshored, and those previously shuttered businesses would require significant modernization. It could very well be that for many companies, it’s cheaper to force concessions from overseas suppliers than try to refurbish long-shuttered capacity here in America.
Those companies brave enough to tackle reshoring may find their products struggle to find buyers, given higher production costs will likely flow through to consumers already panicking over the monthly budgets.
While we may want U.S. manufacturing to regain its former glory, it may prove too big an ask. Sure, there could be pockets of success, particularly in industries where the government is willing to help shoulder the burden. However, austerity reigns in Washington, D.C. right now, and the appetite for spending taxpayer dollars is small given runaway deficits.
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The dynamic isn’t lost on Jim Cramer. Cramer, who hosts a popular show on CNBC and founded TheStreet in 1996 before selling it in 2019, has seen his fair share of market pops, drops, and economic booms and busts.
In his show, he bluntly said that a 20% widespread tariff on imports would be “horrendous” for the economy.
Cramer suggests that the risk that tariffs spark inflation again could backfire on the administration. Anti-inflation rhetoric was a key to Donald Trump’s reelection, and tariffs are inflationary. If not handled carefully, an uptick in inflation could do more damage than good.
If prices rise, consumers may go on strike, increasing the risks of a recession. Much of our economy depends on services, and dips in discretionary spending have already hurt many retail businesses.
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