How tariff inflation may help jobs

Joe Kernen (Co-anchor of Squawk Box) 00:00.000

Well, inflation, tariffs, and jobs are a big part of the debate around the economic forecast for 2026. It's like they were all last year. Senior economics reporter Steve Leesman joins us now with a potential bright spot for the new year and and there were a lot of bright spots

Joe Kernen (Co-anchor of Squawk Box) 00:14.880

in the last year versus what the expectations were, Steve.

Steve Liesman (Senior Economics Reporter) 00:20.200

Yeah, that's right, Joe. But one of the downsides of tariff was that companies would be forced to lay off workers if they couldn't pass along their added cost. But Morgan Stanley in a new report suggests the inflation this year, especially in the third quarter shows companies

Steve Liesman (Senior Economics Reporter) 00:33.760

can and did pass along tariff costs and preserve profits. That means layoffs were somewhat muted this year and could be avoided next year. Morgan Economist writing, we read the Q3 U.S. GDP data as suggesting U.S. corporates took a significant step towards recovering the cost of

Steve Liesman (Senior Economics Reporter) 00:50.640

tariffs. In turn, this should mean less downside risk to the labor market and lower recession probabilities, that's in 2026. In Morgan's analysis, tariffs were absorbed in Q2 2, which meant to hit the profits. It was partly responsible for the soft payroll growth of the past two

Steve Liesman (Senior Economics Reporter) 01:04.960

quarters. But you can see here, but between the first and third quarters, Morgan Stanley found that while tariffs increased costs, companies reduced unit labor costs, raised prices enough to actually boost profits more than costs increased. If firms found they couldn't push out

Steve Liesman (Senior Economics Reporter) 01:21.320

output prices, Morgan said, higher on account of consumer resistance and loss of market share, then we think they would turn to reducing labor costs further, triggering layoffs. Tariff price increases could have one more quarter to go before easing next year. If Morgan Stanley

Steve Liesman (Senior Economics Reporter) 01:36.080

is right, that easing of tariff inflation could coincide with a pickup of jobs in the second half of the year. The risk is that consumers end up balking at higher prices. And of course, this analysis is on average for companies. Some, as you just heard Jan Niffenegger fared

Steve Liesman (Senior Economics Reporter) 01:50.400

better with tariffs and others fared worse, Joe. Yep.

Joe Kernen (Co-anchor of Squawk Box) 01:54.800

Interesting. Peace. What you've been talking about for months now, Steve, in the in the journal today. Um, nobody's getting necessarily laid off or that that much, but nobody's getting hired. That's for sure. Uh, and it's AI, it's it's a it's a perfect storm. It almost seems

Joe Kernen (Co-anchor of Squawk Box) 02:10.640

like immigration, AI, uh, and tariffs, and just trying to do more with less.

Steve Liesman (Senior Economics Reporter) 02:18.720

Yeah, I mean, what's cool about this Morgan report, Joe, is you can see the unit labor costs coming down, keeping a lid on labor and response to and you can see the what they call production taxes, which which is, that's the, that's the line item, which is largely tariffs go up

Steve Liesman (Senior Economics Reporter) 02:33.840

by about 9% over the two-quarter period. Somebody had to pay it, Joe, that was always the case. And the question was, would it create broader inflation or would it create layoffs? It was always going to be one or the two, because companies are going to act, that's our system in

Steve Liesman (Senior Economics Reporter) 02:48.920

order to preserve their profits. And profits, as you, again, you heard Jan say, we're pretty good. So companies adjusted by changing supply chain, that helped reduce the effective tariff cost. But you can see in the accounts of the treasury, the tariffs were paid. So the good

Steve Liesman (Senior Economics Reporter) 03:05.000

news is companies had the pricing power to pass along those costs. That, of course, was bad news for consumers and you can see that show up in some of the polling data.