The Real Story Behind These New Tariffs

0:00Our economy just gave us two big surprises that shape how we will do business and invest in 2025. because we are going through some economic transition right now. Our job market is going through some big changes. We've added new jobs, but our unemployment rate has also climbed and people are leaving the workforce. We'll be talking about that today. And then we will also deep dive into tariffs. What are tariffs? What are the pros? What are the cons? What are the consequences? Let's take a deep, informed, research-based, analytical look at the world of tariffs and what these might mean. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything.

0:42The show that is obsessed with opportunity costs and trade-offs. We cover five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. And on the first Friday of the month, I bring you a monthly economic update, a synopsis of what's been happening in our economy over the past month. So welcome to the December 2024 First Friday Economic Update. Let's begin by talking about the big economic news that dropped this morning, which is the November jobs report. The economy added 227 ,000 new jobs in November.

1:26Now that beat analyst expectations and it beat what we've recently been doing. Job growth has averaged 172 ,000 per month over the past three months. And remember, in October, it got particularly beat up because of the hurricanes and the Boeing strike. Analysts were expecting that in November we would add 200 ,000 new jobs. So at 227 ,000, we have beat those expectations. But what makes this more interesting is the context. The Bureau of Labor Statistics revised the reports from September and October. October had an initial estimate of 12 ,000 new jobs gained due to, of course, the hurricanes and the Boeing strikes.

2:04That revision actually pushed the job growth in November up to 36 ,000. Now, on top of that, the September report also got a boost of an additional 32 ,000 jobs that were previously not reported. So September's numbers, their revised numbers, are 255 ,000. So what that means is across September and October, the U.S. created an additional 56 ,000 jobs that we didn't know about before. That's the equivalent of a small city's worth of jobs that were initially missed in the initial count. So we have good news on the job creation front, but we can't be satisfied with just one number because here's where things get interesting.

2:45The unemployment rate is holding at 4.2%. And while that sounds great at first glance, remember that a year ago, unemployment was at 3.7%. So we've been seeing a gradual uptick in unemployment, which tells us that something is shifting in our labor market. How do we make sense of that? How do we make sense of the fact that we're creating new jobs at an average rate of 172 ,000 jobs per month over the last three months? So we're creating these new jobs, yet unemployment is ticking up. How do we make sense of those two seemingly contradictory pieces of information? Well, the answer can be found by looking at the difference between the establishment survey and the household survey.

3:35So the Bureau of Labor Statistics actually conducts two different surveys every month. And those two surveys tell slightly different stories about our job market. This headline number of 227 ,000 new jobs that were created in November, that comes from something that's called the Establishment Survey. And that's where the BLS surveys businesses to count new payroll positions. But there's also a different survey, and it's called the Household Survey. That is used to calculate the unemployment rate. And that shows something very different. That shows, buckle your seatbelts, hold on to your hats because this is going to shock you.

4:15The household survey shows a decline of 355 ,000 jobs in November. What the what? How does that make sense? Well, the answer comes from the fact that the household survey also tells us that the labor force, which means people who are either working or are actively looking for work. The labor force contracted by 193 ,000 people in November, which means that our labor force participation rate is down slightly to 62.5%. Remember, when we talk about employment or unemployment, we're not talking about jobs relative to the entire population of human beings. We're talking about jobs relative to people who want jobs.

5:09In other words, the yardstick for good employment is if you want a job, you can find a job. The yardstick is not if you exist, you have a job. So labor force participation is down. And so this seemingly contradictory data helps explain why we're seeing the unemployment rate tick up to 4.2 percent. even as businesses report adding jobs. So when we look at both surveys together, we get a more complete picture, which is that while businesses are creating new positions in certain sectors, and we're going to talk about sectors in a moment, while businesses are creating those new positions, we're also seeing some people step back from the labor force entirely.

5:58And this type of detail matters because it helps us understand the full dynamics of our job market. The labor market is really complex, and it can't be captured in a single number. So more jobs are being created while fewer people are working. I want to emphasize that these are not huge shifts. These are incremental numbers, and that's why we watch this month after month, because over the long term, we begin to see trends. And one of the things that we're noticing is that the type of long-term shift that is happening right now is the type that often happens during economic transitions. We are in a time of transition.

6:38And I'm going to add a third number that will really round out this picture. And it's the long-term unemployment situation, which is defined as people who are jobless, people who want jobs, who are jobless for 27 weeks or more. And that is holding steady at 1.7 million people, which is up significantly from 1.2 million people a year ago. That's also a crucial metric because long-term unemployment can have huge, huge ramifications on both individuals and on the broader economy. Think about how much it would suck to want a job and not be able to find one for 27 weeks or more. And so what this all means when you tie all of these numbers together is that we're seeing a labor market that's still growing, but it's becoming more selective.

7:29And that's how jobs can simultaneously be more abundant, but also harder to get. Now, how hard it is to get a job is going to depend on what industry you're in, because there's a lot of variation in where the jobs are being created. The powerhouse of job creation is healthcare, which added 54 ,000 new positions in November. If you're wondering specifically what elements of healthcare, we saw 22 ,000 new jobs in ambulatory care, 16 ,000 new jobs in home healthcare, 19 ,000 new jobs in hospitals, and 12 ,000 in nursing facilities. The leisure and hospitality sector also showed enormous strength.

8:09It added 53 ,000 new jobs this past month, about 29 ,000 of which came from restaurants and bars. This sector, by the way, has been consistently adding about 21 ,000 new jobs per month over the last year. So the report out of November shows that growth here is actually accelerating. There is a hunger for travel, for face-to-face interaction. We were all cooped up in 2020 and 2021, and I think we're still feeling the effects, the pendulum swing, given not only how strong this sector is, but how it continues to grow stronger. Government employment grew by 33 ,000 new positions with the bulk of that coming from state governments.

8:55And this is also a steady trend that we've seen throughout the year. Government job growth has averaged about 41 ,000 per month over the past year. And most of that has been at the state and municipal level. So those are the big winning sectors. Next, let's talk about the warning signs. What's not doing well? Retail. Retail trade lost 28 ,000 jobs right as we entered the holiday season. And general merchandise stores took the biggest hit. They dropped 15 ,000 jobs. There are some analysts who think that this might be due to the later timing of Thanksgiving this year. Remember, Thanksgiving moves its date each year.

9:36It's always on the fourth Thursday of the month. This year, the fourth Thursday of the month was pretty late into the month. So that might have had an adverse effect on holiday shopping and retail. But it's unlikely that that would have accounted for all of the job loss in this sector. So retail is something to watch closely in the coming months. Technically, manufacturing saw a boost of 32 ,000 jobs, but this is actually a one-time factor. This mainly reflects workers that were returning from strikes rather than new job creation. On paper, we're seeing a figure that is technically classified as growth, but it's actually just a one-time step up of a return to the norm.

10:19Now, we've been talking about jobs, but wages overall are up quite a bit. Average hourly earnings rose by 40 basis points in November. So that's almost half a percentage point. It's four-tenths of a percentage point. And that might not sound like much, but that was just for the month. If we look at the year, wages are up 4 % compared to last year. Now, the reason why this matters is that both the monthly and yearly numbers came in 10 basis points higher than economists expected. Now, for workers, this is great because this continued wage growth is helping workers maintain purchasing power and keep pace with inflation.

11:03In fact, over the past 12 months, that wage growth has actually exceeded the inflation rate over the trailing 12 months. But, but it is not distributed evenly. Because if we break this down further, there is a distinction between production versus non-supervisory employees. So basically, if you think about frontline workers rather than managers, frontline workers saw their hourly earnings rise by 30 basis points in the past month rather than 40 basis points. And if we look at the yearly trend, we also see depressed increased earnings for frontline workers as opposed to managers. People in managerial positions, on average, over the past 12 months, have wage growth that has kept up with, if not exceeded, the last 12 months of inflation.

11:54But frontline workers and lower paid workers aren't seeing those same gains. So we have some bifurcation here. We have a K-shaped recovery. These types of wage trends can give us some really important clues about both consumer confidence as well as the potential pressure on prices. Because when we see wages that are consistently rising, it typically means that consumers have more spending power. And in the U.S. economy, which particularly is very largely driven by consumer spending, that is significant for our broader economic outlook. It means that we're likely to see strong economic growth. It means that we are likely to continue to see high levels of employment slash low unemployment.

12:40But here's the thing. Robust consumer spending also has huge inflation implications. And this is where things get really interesting for market watchers. The jobs report has significantly shifted expectations for Fed policy. Financial markets are now pricing in an 89 % chance of a rate cut at the Fed's December meeting. That's up from a 72 % chance, which was what the market had priced in, before this morning's report came out. In other words, get rid of the numbers and summarize this, the probability that the Fed is going to cut rates at December's meeting just got bigger. It's more likely now than it was yesterday that the Fed is going to cut rates at their December meeting.

13:33Why? What's the thinking? Well, there was a bit of an uptick in unemployment, and there was some softening in the labor force participation rate. And that combination of those two things gives the Fed room and reason to start easing. Let's recap all of this. What we saw was that in November, job creation accelerated, but the labor force contracted. 227 ,000 new jobs were created, but the labor force contracted by 193 ,000 people. This suggests that we are entering a period of transition, and the Fed looks like it's ready to continue rate cutting, and that could reshape the employment landscape in 2025.

14:22Markets are already pricing in two or three rate cuts next year. with treasury yields falling based on this morning's jobs report. What we see is that our job market is showing a lot of resilience while simultaneously signaling some cooling. It's got enough strength to support consumer spending and economic growth, but it also has enough weakness to potentially trigger a shift in monetary policy. Now, I know some of you might think, hey, weakness might be a strong word for that. Aren't we just talking about the Fed bringing interest rates back down to what they were? That is recency bias at work.

15:01Rates, where they are right now, rates are historically normal. The Fed doesn't bring down rates to get it to some type of idealized normal, which is another way of saying the Fed doesn't have a target interest rate. The Fed has a target inflation rate, but it doesn't have a target interest rate. So if the Fed lowers interest rates, it's not because it has a goal of bringing interest rates down. It's because it sees some softening in the economy and wants to spur the economy through that rate cut. And so those are all of the takeaways from the November Jobs Report, which came out this morning, the first Friday of December.

15:48We're going to take a moment to hear from the sponsors who make this show possible. And when we return, we're going to talk about tariffs. The kids are back in school now, and I finally have some extra time to plan a weekend getaway for just us. We've been wanting to visit Lancaster County, Pennsylvania for a while now because I've heard so many people rave about it. We love exploring new places, finding the cutest shops, and eating at restaurants that the locals love. DiscoverLancaster.com is the best place to learn about the unique things to do and upcoming events. Plan your chip alongside us at discoverlankaster.com slash amplified.

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17:38That's three months of free payroll at gusto.com slash Paula. One more time, gusto.com slash Paula, G-U-S-T-O dot com slash P-A-U-L-A. This Friday, the NBA on Prime tips off with their debut doubleheader. First up, Boston brings the action to the Garden as the Celtics face the New York Knicks. Then out west, it's a battle of the superpowers as the Lakers try to poster the relentless pace of the Minnesota Timberwolves. The Celtics and Knicks, who has the most hustle in defense? This game will come down to who wants it more. And the Timberwolves and the Lakers, it's two Western Conference heavyweights going toe-to-toe.

18:25Buckle up, folks. This one's going to be electric. Celtics-Knicks, T-Wolves and Lakers. Coverage starts Friday, 7 o 'clock Eastern, only on Prime.

18:44Welcome back. We turn our attention to tariffs. We will answer the question, what are tariffs? What are some of both the benefits and the drawbacks of instituting tariffs? What statements have been made directly by President-elect Trump related to his plans to impose tariffs in the upcoming year? What effect might this have on U.S. consumers and U.S. workers? And how clearly can we distinguish between knowledge and speculation? Let's start by answering the question, what are tariffs? A tariff is a tax imposed by one country on goods imported from another country. Tariffs are an important tool in the regulation of foreign trade.

19:32Let's walk through an example. let's say hypothetically, that there is a blanket 25 % across the board tariff on all goods that are imported from Mexico. Who pays that? The importing company that is based here in the United States, the company that is bringing those goods from Mexico into the United States, will pay that 25 % tariff. That money would go to the U.S. Treasury. That contains a variety of consequences. Number one, it increases revenue for the U.S. Treasury. Number two, it incentivizes the importing company to turn to domestic production and domestic manufacturing as an alternative whenever possible.

20:21For example, if you run a clothing company, an apparel company, and you are currently having that clothing made in Mexico or in Canada or in China, then from your point of view as the owner of that importing company, it's a simple math equation to decide if that tariff is sufficiently high enough, if it's onerous enough for you to stop using the services of the overseas company and instead start using a domestic manufacturer. And if you crunch the numbers and the spreadsheet says, yes, it's worth paying that added tax, it's worth paying that added tariff, all right, that's your choice as a company owner, and the U.S.

21:06Treasury collects that added revenue. But by contrast, if you, as the U.S.-based apparel company owner, decide, you know what, that tariff makes it cost prohibitive, it would be cheaper for me to use a domestic, a US-based manufacturer, well, then that tariff has had the effect of spurring job creation inside of the United States. So that is the advantage of tariffs. It can bring a boost to US production, and it can bring a boost to those homegrown, made-in-the-USA goods. The disadvantage, however, is that if the importing company is paying those tariffs, then that means higher prices for those companies, for those importing companies, which leads to higher prices for U.S.

21:50consumers. Because if imports are more expensive, and therefore the cost of imported goods are higher, then those prices have to get passed on to the consumer. The importing company can take some of the hit, but they only have so much margin that they can eat. Remember, their employees are expecting wage growth and their own costs of everything from software to the rent on their warehouses has gone up. So at a certain point, there is just no more profit that they can lead. And the only way for them to be able to stay in business would be by raising those prices. So tariffs can have a positive effect in that they spur job creation domestically, and they can also have a negative effect in that they lead to higher prices for consumers.

22:36Now, you'll recall when we talked about the November jobs report, as you remember, manufacturing didn't see any new job growth in November. The 32 ,000 jobs that it reported mainly reflected workers that were returning from strikes rather than new job creation. Tariffs are intended to address that issue. Tariffs are intended to boost domestic manufacturing. And that's precisely why the leaders of many foreign nations are quite concerned about this. As importers are incentivized to turn to domestic production to avoid paying higher costs, exporters that are based in China or based in Mexico or based in Canada might cut their prices in order to stay in business.

23:19In other words, those exporters will take a hit to their profits in order to stay alive. And this would harm the economies of the exporting countries. It could significantly harm the economies of Mexico or Canada. And that's one of the reasons why Justin Trudeau, the prime minister of Canada, made a trip to Mar-a-Lago a few days ago to plead with President-elect Trump not to impose these blanket tariffs. Trudeau was the first foreign G7 leader to meet with President-elect Trump since the election. Turning our attention for a moment back to the U.S., we'll talk more about Mexico and Canada and China in a moment.

23:53And there's a reason that I'm highlighting those three nations. But turning our attention back to the U.S., we have spoken so far about tariffs in a monolithic manner. But all conversations about the economy are sector-specific or industry-specific. And there are some industries that benefit from tariffs more than others. Steel and aluminum, for example, sugar producers, and the auto industry, these historically have benefited quite a bit from tariffs. What's interesting about the proposals for how tariffs would be implemented in 2025, what makes them a little unique in a historical context, because tariffs have been around since the 19th century, tariffs have often been assessed in an industry-specific manner historically, meaning that certain industries were targeted with tariffs in order to selectively protect specific types of domestic producers.

24:50Now, what's notable about President-elect Trump's proposals is that he is proposing across the board tariffs in which the variation is based on source country rather than industry. And there are a few particular countries that he has singled out. I'm going to quote directly from a couple of posts on Truth Social. President-elect Trump wrote, quote, On January 20th, as one of my many first executive orders, I will sign all necessary documents to charge Mexico and Canada a 25 % tariff on all products coming into the United States and its ridiculous open borders. This tariff will remain in effect until such time as drugs, in particular fentanyl, and all illegal aliens stop this invasion of our country.

25:48Both Mexico and Canada have the absolute right and power to easily solve this long-simmering problem. We hereby demand that they use this power. And until such time as they do, it is time for them to pay a very big price. End quote. So that was what he said about specifically Mexico and Canada, our neighbors. And it has elicited a strong response, both from Trudeau, who we just talked about, as well as Mexican President Claudia Scheinbaum, who issued a rather scathing rebuttal. But in addition to Mexico and Canada, President-elect Trump is also targeting the other major world power, China. I will quote him directly.

26:37He wrote on Truth Social, quote, I have had many talks with China about the massive amount of drugs, in particular fentanyl, being sent into the United States, but to no avail. Representatives of China told me they would institute their maximum penalty, that of death, for any drug dealers caught doing this. But unfortunately, they never followed through, and drugs are pouring into our country, mostly through Mexico, at levels never seen before. Until such time as they stop, we will be charging China an additional 10 % tariff, above any additional tariffs, on all of their many products coming into the United States of America.

27:27Thank you for your attention to this matter. End quote. Now, after he said that, he issued another warning, and I won't quote this one directly simply because I don't have it in front of me at the moment, but it pertains to the BRICS countries, B-R-I-C-S, which is Brazil, Russia, India, China, South Africa. China, of course, which he had previously stated that he would charge them an additional 10 % tariff, China was included in this grouping of BRICS countries in a follow-up statement in which President-elect Trump stated that if the BRICS countries continue a cross-border payment rail system, then he would impose a 100 % tariff on all of those nations.

28:18If you listened to last month's First Friday episode, we talked about this. And if you listened to our interview with Tatiana Kaufman, we talked about this in that episode as well. Cross-border payment rails are networks that allow for the transfer of digital money between countries and between continents. So they connect financial institutions and serve as the underlying infrastructure for international payment methods. Now, the reason that the BRICS countries are trying to develop this system is because they want to develop a method of payment that is a competitor to the U.S. dollar. The US dollar is currently the world reserve currency, and they are trying to compete with that.

29:01They're trying to develop an alternative world reserve currency. If you listened to the last First Friday episode a month ago, we discussed this entire attempt, and I gave my take on it, which is that I don't think they'll be successful at doing so. And now, with this newest development, which is that President-elect Trump is threatening 100 % tariffs on the BRICS nations if they continue to even attempt to do so, they are hugely disincentivized from making an attempt that I think many, myself included, would characterize as a Hail Mary attempt. What's interesting about the idea of U.S. tariffs on the BRICS nations is that generally speaking, the tech sector historically has not really been impacted by tariffs, not in any major way.