Anna Wong: Empty Shelves Are Coming Soon

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1:20Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, the number, one of the main things I'm watching right now are those container shipping numbers that at least looking out at the next few weeks, it looks like lots of actual orders are being canceled and there is the risk of material shortage of things from China emerging in a fairly short period of time. Yeah, I think we're kind of getting to the rubber meets the road portion of the tariffs, right? So everyone was talking about the potential of some sort of trade restrictions going into this year because we knew that Trump had won the election and he wanted to do some of this stuff.

2:02And so what we saw broadly for the first quarter was people trying to get ahead of that. So building up their inventories, ordering a bunch of stuff before some of those restrictions were expected to get in. But of course, that can only last so long. And on Liberation Day, April 2nd, Trump unveiled these really quite sweeping, quite dramatic tariffs, as we all know by now. And so I think people are starting to get concerned that like now is when we're really going to begin to see some of that impact. That's right. So, by the way, we are recording this April 23rd. It's 2.36 p.m. Yesterday, we got a little bit of softening and Trump saying, oh, it's not going to be 145.

2:44But then today we got stuff that's like there's not going to be any unilateral concessions. We don't really know. There has been this little softening of the tone. But look, one point of tariffs is to reduce our reliance on China, to partially decouple, etc. But then when you look at the reality of, OK, well, that's what we're doing. We're decoupling. We're buying less. It looks like it's coming very sharp and fast and perhaps to a degree that's not even really about inflation per se. Right. Because, you know, a year ago, people were talking about this in the abstract. What does the Fed get into inflation?

3:17People are talking about empty shelves of a lot of things. Well, I think this is still a big question. Like, I think there is some of this that could be attenuated by companies just choosing to raise their prices and maybe not order as many different types of things. But yeah, we are seeing some analysts start to talk about the possibility of empty shelves. And in fact, we're going to speak to one now. That's right. We have the perfect guest. We are going to be speaking with Anna Wong. She is our chief U.S. economist at Bloomberg Economics. Thank you for joining us, Anna. You tweeted about empty shelves in this sort of imminent term.

3:52What is the data you're looking at and when would you expect to see people really start noticing it? Yeah, Joe and Tracy, happy to be here again. So, you know, many people have been talking about how, based on the cancellation of shipments, and right now we have, as you mentioned, we have seen plummeting container bookings. And already in April, the first two weeks of April, we have seen weekly imports data from China to U.S., even from South Korea to U.S. dropping very quickly. And typically, when we think about holiday season retail, which starts really with Halloween in October, the U.S. company should be planning right now, right?

4:48Usually they plan in the spring and then they start putting in the orders now, especially for items like toys and apparels and electronics for long lead time. And so in the summer, basically throughout June, July, August is when China should be shipping these things to the U.S. So we are right in this period where all this planning has to happen, yet this is also when tariffs are implemented. So as a result, basically the inventory for Christmas, for Halloween, is already being disrupted right now. So even though it's still many months away and, you know, with the 90 day delay on the reciprocal tariffs, we are not, you know, it's not until July 9th where we have U .S.

5:47firms have better clarity on whether these tariffs vis-a-vis other countries would be raised. And so basically it exactly fell on this planning and shipping and producing period for holiday season. So I think this is one reason why just based on the high frequency data we have on the volumes, on the quantities, the dropping of it, and also just the timing of this period, it suggests that there's a high probability that we may be seeing some empty shelves in the holiday season. And even with less varieties, I basically consider that part of the empty shelves, just having less varieties. So talk to us about prices here, because, you know, I sort of mentioned in the intro that one thing you could do if you're a retailer who isn't importing as much as you used to, you could just raise your prices massively, right, in order to try to offset some of the loss of supply.

6:53So this kind of goes back to the old price over volume theme that we saw during the COVID pandemic. Is that an option here? Or is it the case that you think the uncertainty is so high that people just aren't ordering pretty much anything? Yeah, so we can look at some of the data because we already have data up to March for import prices, PPI and CPI. And that covers basically two months of the trade war where U.S. raised tariffs on China by 10 percent in February and then another 10 percent in March. That's already many times larger than in the first trade war. So what we are seeing in prices so far indicate that, number one, most of the Chinese tariffs have indeed been fully borne on the U.S.

7:47side by, you know, whoever. But just we can see that it's mostly 100 percent pass-through at the border to U.S. importers. This is with two months of data. And second, And looking at PPI data, this is the next stage, right? Once the U.S. importers bring in those products, they sell those products to intermediate firms or even to wholesale firms, to distributors. So the next stage is looking at PPI. And we also have seen a positive correlation between tariff shocks across products in February and March versus PPI increase in March. So there is also some small pass through to PPI prices, but not 100%.

8:42So finally, from PPI to CPI, you still have that big segment of wholesaler distributors. And this is where that pass-through broke down. We have not seen much evidence yet that it's showing up in consumer prices. And in fact, if you plot a similar scatter plot where you have on the vertical axis, the CPI change in March versus on the X axis, the tariff increase by product, you actually would see negative correlation. and meaning that the more china exposed it is to that to in that goods actually the more deflation you're seeing and we have seen that negative correlation held over the last three months as well as for most of last year which suggests that there is actually an other major part to this whole trade war price pass-through story which is china is going through a deflationary spiral.

9:46And domestic prices in China is very, very competitive right now. So that's one element. And I think broadly, these three type of prices is consistent with what we are seeing also in soft data. So in recent days, we have seen from Richmond Fed, Philly Fed and various manufacturing survey data that shows price paid have surged, yet price received, even though it also has increased, has not increased even to the amount of the price paid, which suggests that a lot of the, at least up to March, the evidence is that much of the tariffs, number one, has been borne by the US side. Number two, have been absorbed through a compression of profit margins.

10:40Yeah, I think this is really important. And also basically the big question here is how much of that cost pass through actually makes it down to consumers. And I'm so glad Anna brought up the wholesalers because they're sort of the forgotten element of price pass through in all of this. And obviously they have their own profit margins to worry about. But if they are absorbing potentially some of the costs, then that does add a sort of extra cushion on for consumers. By the way, yesterday, April 22nd, in the newsletter, I spotlighted this gap between prices received and prices paid in some of those regional Fed surveys.

11:18And Tracy was kind enough to draw teeth on it to make it look like the jaws of death that are coming for your profit margins. And OK, maybe the prices don't get passed on to consumers fully, or maybe it's just partially. Prices received just go up a lot. Tracy described it as cushion. But what does economics tell us about when profit margins get clobbered or profit margins go negative? What does that do to the impulse for investment and hiring and then the possibility of layoffs? Yeah, exactly. That is the key question. And when profit margins are squeezed, it means the primary burden of adjustment to tariffs fell on stock prices and also on unemployment and CapEx.

12:07So we're expecting investment to significantly slow down in the second half of this year in response to lower profit. Everything on the investment side responds to profits. Yeah. Right. And also, then ultimately, unemployment and real wages will adjust. So unemployment, we are expecting it to go up to 4.8 % by the end of this year, and peaking at 5.3 % next year, and real wages will fall. And, you know, services sector account for about two thirds of the core PCE basket. And so when you think about how, you know, at the end of the day, maybe a year from now, what we will see is that there's basically a reallocation between prices, right?

13:03So goods prices probably will be higher on a level basis. But at the same time, real wages, which drives services costs, will come down significantly. And, you know, some of the most demand elastic sectors in the economy are travel related. and with elasticity of demand that's higher than one and also to income as well, elasticity to income that's higher than one. That means that when the economy slows down, we should be seeing a lot of disinflationary pressure coming from the services sector. And in fact, I think we already have seen some early clues of that in the March CPI report. Hotels, car rentals, airfares have all been plummeting, seeing deflation actually in March.

13:55And even in the S &P 500, you see that it's the airlines stock prices that have been hit the hardest because that's where the discretionary spending will be pulling back. Thank you.

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15:16EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Let me just ask one question. One of the frustrations that pretty much everyone operating in the economy right now seems to have, including podcasters, by the way, is there is so much uncertainty and the headlines are coming out fast and furiously. It's really hard to keep up. And, you know, even if we get this episode out in the next one or two days, we don't know if the Trump administration is going to announce something completely different when it comes to tariffs. how hard or easy will it be to actually start to rebuild inventories if we were to get some certainty on the substantial rollback on the tariff front going back to the planning for holiday season right so firms should be planning now for if they want goods to be on the shelf in october so it takes at least six months for the whole planning to take place but does anybody have enough certainty about six, you know, and even in 30 days time to know to to to be ready to potentially get hit by tariffs.

16:29So an example is what we have seen in February and March in the import price data. I mentioned that almost 100 percent of the tariffs on China has been passed through at the U.S. border. And the thing is, it's because most of those goods had been in transit already before these tariffs were even on the horizon. So they were already en route in January. So there was no time to discuss between the importer and exporter how to share the burden. So if a U.S. firm is thinking about restocking, suppose that they have enough stock to last them until June based on the front running we have seen in the imports data so far.

17:12So they have enough until June and now they're planning, should they start to plan for restocking beyond June, then they need to basically think like a risk neutral agent. So in economics, when one is, you know, in these models, when we think about how does a person make a decision, a rational decision in the face of uncertainty, you calculate the risk neutral, you know, optimization equation. So it would be, you know, probability of a scenario of a tariff multiplied by the net cost and then plus, you know, different probability of scenarios. So right now, we have seen that tariffs on China is, you know, over well over 100%.

17:57And because of that extremely high cost to that tail outcome, like, suppose that there were further escalation between you as a China. And now you know that the probability of tariffs on China could potentially even go to 200 percent. You know, I'm not saying that will happen, but it seems like quite plausible now anything could happen. So in that case, your loss in this, you're trying to minimize this loss function. And then you have a massive loss. This is why we are seeing cancellation of orders. It's because in the risk neutral optimization, given these high risk outcome, it doesn't make sense for you to actually take the risk of potentially, you know, having the good arrived at the border only to find out that, oh, you are 200 percent of the tariffs.

18:51And this is why it's a high probability that given the uncertainty and the time it takes to plan for the goods to be on the shelf in the fall, that I think is the high probability outcome that we'll have empty shelves and lack of varieties. I just have one last question. We are in this sort of weird space where we see what's on the screen and we see the surveys and all that. But day-to-day life when I go to the store is pretty normal. And like we said, we haven't seen the pickup in the layoffs data yet, even though everyone is anticipating all the surveys are dismal. But, you know, I think for most, you know, the three of us anyway, by and large, life goes on.

19:36Although Tracy has received emails from various companies that she buys from. One of the things I'm learning in all of this is that I am on a lot of mailing lists for random stuff. So I've gotten an email from a company that sells fake flowers saying that their prices are probably going to go up because so much of it is made in China. I've gotten an email from a provider of a home battery storage system because I was kind of interested in that. saying that prices were also going to go up. So we'll see what else. One thing about fake flowers, by the way, is that was one of Hong Kong's very first export industries was that they really like corn.

20:12I did not know that. Yeah, they did. That was a huge, you know, then they eventually did high-tech things. But fake flowers was an early industry. They came to dominate. Why do you know this? And one of those, some random things. Oh, yes, Joe. And in fact, it was the bread and butter of the richest man in Hong Kong, Li Ka-ching. got his start with making plastic flowers. This is so great. I like have this random, random fact stuck in my head. I'm amazed you know this, George. I don't know how you remember that. And then you were able, the alley-oop there between me and Anna. Real quickly, holiday season potentially very damaged.

20:49But when would you say we start to see this in sort of either our day-to-day lives or at least in hard data? Well, I think anecdotally, these stories are filtering in. I mean, for anyone who will be having a broken AC system, especially a central AC system, come summer, you'll find that many of the parts actually came from China and only manufactured in China. And your service company will tell you they can't do nothing about it because nobody's importing any of those parts. And, you know, there will be more and more stories like that. In terms of the hard data, I think in the April, meaning next month, we will get the April's import volume data, which for the whole month, and it will be clear that the volume is already declining very quickly.

21:42And I think for now, for people who collect big data, so web scraping, I think one could be scraping. You know how on Amazon, it actually lists how many of these items are remaining. Like it tells you like three more left, five more left. Start paying attention to that. and you see that those three more left, two more left is dwindling without increasing. Anna, you're going to add to my already innate tendency to stockpile things. So thank you for the advice. Anna, I'm sure you're as busy as we are updating models every day with every new headline. Thank you so much for coming on OddLot. No problem.

22:45Tracy, that was unnerving. You know, this didn't actually come up, but one of the things I've been thinking about is the disparate impact that this will have on small versus big businesses. Oh, yeah. Because like a really big business, you know, they could lose money, right, for a quarter or two and go be, you know, continue for a while as a going concern. There are going to be small businesses that literally just cannot pay that tariff bill, and that's lights out for them. Yeah, I think I wrote about this in the newsletter a few weeks ago, but that seems almost certain to happen. And also, the bigger businesses obviously do have some pricing power.

23:19They might have some ability to negotiate with their suppliers. I think Walmart is already trying to do that with China at the moment. So yeah, the scales seem very, very much tipped in favor of the big guys over the small. It is also very unsettling just to think that all of this is by choice, right? Like this is a policy decision by the current administration. It almost seems like it was probably a bad time to do this right in the spring planning season, right before the summer shipping season for the later retail buying season. It feels like this was, yeah, not a great time. Well, you know, I find it interesting that for years since I was a teen, culture worked the war on Christmas.

24:04This is a literal. No, for real. Right. We've been hearing that forever. And Anna's talking about empty shelves over the holidays. What is that? It's they're winning the war on Christmas. I don't know. Like, well, on the plus side, I guess people have been complaining about American consumerism for a very long time. So here we go. An exercise in austerity. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow Anna Wong. She's at Anna Economist.

24:37Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more All Thoughts content, go to Bloomberg.com slash All Thoughts, where we have a daily newsletter and all of our episodes. and you can chat with fellow listeners 24-7. What are you seeing out there in the real economy? What niches are you aware of the way Tracy is aware of artificial flowers? Chat with other listeners, discord.gg slash oddlots. And if you enjoy Oddlots, if you like it when we talk about what economists are seeing when it comes to the impact of tariffs, then please leave us a positive review on your favorite podcast platform.

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