How tariff inflation may help jobs

Economic Forecast and Labor Market - The debate around the economic forecast for 2026 is heavily influenced by inflation, tariffs, and jobs, with a potential bright spot emerging for the new year [1] - Morgan Stanley's report indicates that inflation in 2023, particularly in Q3, shows that companies managed to pass on tariff costs, which helped preserve profits and mitigate layoffs [2][3] - The report suggests that the US corporate sector has made significant progress in recovering tariff costs, leading to reduced downside risks for the labor market and lower recession probabilities for 2026 [2] Tariff Impact on Profits and Employment - In Q2, tariffs negatively impacted profits, contributing to soft payroll growth over the past two quarters, but companies managed to reduce unit labor costs and increase prices sufficiently to enhance profits [3] - If companies are unable to raise output prices due to consumer resistance, they may resort to further reducing labor costs, potentially leading to layoffs [4] - The easing of tariff inflation could align with a job recovery in the second half of the year if Morgan Stanley's predictions hold true [4] Consumer Behavior and Pricing Power - There is a risk that consumers may react to higher prices, which could affect overall economic dynamics; however, the analysis reflects average company performance, with some faring better than others under tariffs [5] - Companies have shown the ability to adjust their supply chains to mitigate effective tariff costs, indicating they possess the pricing power to pass on these costs to consumers, which has implications for consumer sentiment [8]