Where will consumers go?

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Investors crushed the stocks of consumer discretionary companies on Thursday in response to President Donald Trump's tariff announcement, making little distinction between home goods companies such as Williams-Sonoma Inc., apparel names including Nike Inc. or restaurants such as Cheesecake Factory Inc. The concern about consumers makes sense; tariffs will squeeze already stretched household budgets and put downward pressure on a labor market that was uneven at best.

Yet tariffs won't affect every part of the consumption basket equally. Some categories, particularly automobiles, home furnishings and apparel, will bear the brunt of the levies, with prices on imported goods likely to soar (giving domestic producers an excuse to follow suit). Many consumer service categories, on the other hand, won't see their costs go up much, if at all. This will be especially true for anything that's local and labor or real estate intensive. Once the dust settles, consumers are likely to shift their spending from goods to services if tariffs remain in place at announced or similar levels.

One way to think about this is as a reversal of what we saw in the middle of 2020 when consumers binged on goods but stayed away from dining out and travel during the early days of the COVID-19 pandemic. That shift was supercharged because spending on travel and going out fell sharply, leaving a bigger share for goods, and because fiscal support from the federal government gave households so much money. Between the end of 2019 and the third quarter of 2020, consumer spending on transportation services fell by 31% while it increased 13% for durable goods.

The shift was a curveball for investors and companies alike. Stocks of e-commerce companies surged as investors, already enamored with the secular trend of retail moving online, extrapolated the pandemic growth out well into the future. Companies built warehouses and hired as quickly as possible to meet demand, leaving them over-invested when spending eventually cooled after the pandemic boom. Supply chains were snarled in the process and economic bottlenecks emerged, resulting in inflation and disruption as the economy was forced to adjust to abnormal spending patterns.

How differently would a tariff-induced adjustment play out over the next couple of quarters?

But a move away from spending on imported goods that have surged in price should leave somewhat more money available for services than would be the case in a broad consumer slowdown. Take automobiles as an example. The average transaction price on new vehicles in 2024 was roughly $50,000. If prices rose $5,000 in response to tariffs and sales slumped to an annualized rate of 13 million, or about 2.5 million below the pace seen in 2023 and 2024, consumers would be spending $60 billion less on automobiles than in the pre-tariff days, with those savings available to be spent elsewhere. Similar dynamics could play out in home furnishings, where consumers currently spend roughly $500 billion on an annualized basis, and even smaller ticket items such as shoes or yoga pants might not seem as essential after big price increases.

This should make spending on services somewhat more resilient, particularly budget-friendly choices. Money from unbought tennis shoes can go to tickets for the latest versions of Jurassic World or Superman. Instead of buying a new sofa, Americans might choose to go to a baseball game or a bowling alley or an amusement park. Money spent on dining and experiences instead of goods might save the jobs of restaurant workers at the expense of auto workers.

When it comes to the impact of tariffs on consumers, there's no reason to think the effect will be the same across categories. This isn't like a gasoline price shock where demand is relatively inelastic and just means less money left over for everything else. Imported goods are going to go up in price while there will be no sticker shock for many services, making them look relatively more affordable to consumers who are already in a bargain-hunting mood. The White House believes that embracing tariffs will lead to a return of manufacturing jobs; ironically, the levies may end up sustaining the service industry at the expense of the goods sector.

(COMMENT, BELOW)

Previously:
• 09/17/24 U.S. 'Battery Belt' will be a new kind of job magnet
• 09/10/24 Americans have a new piggy bank to raid --- their houses
• 10/03/23 America's greatest public policy success is now in jeopardy
• 09/12/23 The housing market is tilting in favor of renters
• 08/18/23 RIP recession. Is it time to worry about
• 05/24/23 This Goldilocks economy has an end date
• 05/24/23 Bye-Bye, New York. Hello, Fayetteville
• 04/04/23 What makes this economic slowdown different from the others?
• 02/15/23 Higher mortgage rates is what the housing market needs now
• 01/06/23 The January inflation bump Americans should welcome
• 01/04/23 Why millennials are following boomers to the South
• 10/24/22 Two bright spots in a cooling housing market
• 08/18/22 Future remote workers need to network more --- in college
• 06/17/22 Housing market cooldown will only lead to more dysfunction
• 05/27/22 Welcome to our be-careful-what-you-wish-for economy
• 05/04/22 The Amazon economic indicator says inflation is easing
• 01/20/22 Don't call me on Friday. That's my 'me time'
• 01/06/22 2022 is the year to buy your first luxury electric car
• 06/03/21 The post-pandemic boom will have a sequel in 2022
• 05/31/21 Florida may lose some of its boomer shine
• 01/11/21 Colleges bet on football in their own K-shaped recovery
• 12/31/20 Just send the bigger bucks already
• 08/24/20 Young people can't buy homes until older owners . . . move on
• 08/18/20 Our pandemic love affair with e-commerce could soon sour
• 08/10/20 Booming 'zoom towns' should ease city housing costs
• 07/11/20 With a Biden economy, will America be condemned to relive the '70s?
• 07/14/20 Renting and homebuying swap roles in the covid-19 market
• 07/13/20 Markets may have a reason to rise along with covid-19 cases
• 04/27/20 U.S. economy may have hit the coronavirus bottom
• 11/12/19 The 2020 economy should feel a lot better: What to, realistically, expect
• 04/23/19: Gen Z is likely to temper aging socialist millennials
• 03/25/19: All signs point to a housing boom ahead
• 02/19/19: Trump's economic gamble might make sense
• 02/15/19: Scaring off Amazon will backfire for the Left
• 01/29/19: The 2020 election will shred the Obama coalition
• 11/15/18: Amazon proving the 'rich get richer'?
• 11/13/18: How gerrymandering can reduce the partisan divide
• 10/22/18: The politics of the next recession will be a disaster
• 08/02/18: The future of the US looks a lot like ...
• 05/05/18: Brick-and-mortar stores may start to make sense again
• 05/05/18: College admissions season is about to get much easier
• 05/03/18: Changing housing needs of millennials will change economic development
• 02/13/18: The big idea for Middle America is to think small
• 02/07/18: Dems are caught in a tax bill trap this year
• 10/25/17: Good times have come to Trump-leaning states

Sen is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.