Anna Wong: Empty Shelves Are Coming Soon

If you look at most of the official hard data right now, there still isn't much evidence of a sharp downturn. Sure, all the surveys are abysmal, but the actual measures of economic activity are ok. But there is already data showing something severe is happening, and that can be seen in the volume of cargo flowing from China to the US. Of course, this is intentional. This is the whole point of tariffs. But the fear is that this is going to be acute and dramatic to consumer companies, and that it will happen very soon. On this episode of the podcast we speak with Anna Wong, Chief US Economist at Bloomberg Economics, who walks us through the real life and macro-economic impact of what we've already seen. She says that the tariffs hit right at the moment that major retailers are planning for their holiday merchandise, and that before too long we'll start seeing fewer goods and fewer varieties of all kinds of things. We also discuss the inflation dynamics, and how tariffs may not show up in terms of higher CPI, but instead through higher layoffs, compressed profit margins, and falling real wages. Read More: The Jaws That Could Devour Your Profit MarginsOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

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  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

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• 1:41Speaker 01

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• 1:57Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:02Tracy Alloway?

  And I'm Tracy Alloway.

• 2:03Joe Weisenthal?

  Tracy, the number, the, 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.

• 2:24Tracy Alloway?

  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. And 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 2, Trump unveiled these really quite sweeping, quite dramatic tariffs, as we all know by now.

• 3:01Joe Weisenthal?

  Yes.

• 3:01Tracy Alloway?

  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.

• 3:09Joe Weisenthal?

  That's right. So by the way, we are recording this April 23. It's 2:36 PM. Yesterday, we got a little bit of softening and Trump saying, oh, it's not going to be 145. But 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, et cetera. But then when you look at the reality of, okay, 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, it's not even really about inflation per se, right? Because a lot, you know, a year ago, people were talking about this in the abstract.

• 3:52Joe Weisenthal?

  What does the Fed get to inflation? People were talking about empty shelves of a lot of things.

• 3:57Tracy Alloway?

  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.

• 4:15Joe Weisenthal?

  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 the sort of imminent term. What is the data you're looking at? And when would you expect to see start, people really start noticing it?

• 4:36Speaker 04

  Yeah, Joe and Tracy, happy to be here again. So, 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 is, which starts really

• 5:18Speaker 04

  with Halloween in October, the U.S. companies should be planning right now, right? Usually, they plan in the spring, and they, and then they start putting in the orders now, especially for items like toys and apparel and electronics for long lead time. And so, in, in, in the summer, basically throughout June, July, August, is when China should be shipping these things to 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...

• 5:59Speaker 04

  As a result, the um basically the inventory for Christmas for Halloween is already being disrupted right now. So even though it's still many months away, uh and you know, with the 90 day uh delay on the reciprocal tariffs, uh we are not, you know, we it's not until July 9th where we have uh US firms have better clarity on whether uh these uh 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

• 6:44Speaker 04

  data we have on on the volumes and the quantities, the dropping of it, and also just the um, you know, the the timing of this this period, it suggests that there's a high probability that we may be seeing some empty shelves uh in in the holiday season. And even with less varieties, uh um I I consider I I I basically consider that part of the empty shelves, just having less varieties.

• 7:12Tracy Alloway?

  Mm hmm. 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. So 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?

• 7:46Speaker 04

  Yeah, so uh we can look at some of the data, because we already have uh data up to March for import prices, PPI and CPI, and that covers basically two months of uh the trade floor where US raised tariffs on China by 10% in February and and then another 10% in March. That's a Many times larger than in the first trade war. So what we are seeing in the in prices so far indicate that. Number one, most of the Chinese tariffs have indeed be been fully borne by on the US side. Uh by, you know, whoever, but just we can see that it's.

• 8:30Speaker 04

  Mostly one hundred percent pass through at the border to US importers. Uh this is with two months of data. And second, looking at PPI data, this is the next stage, right? Once the US importers bring in those products, they sell those products to intermediate firms. Or even to, uh, you know, wholesale firms, 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.

• 9:08Speaker 04

  Increase in March, so there is also some small pass through to PPI prices. Hmm. Uh but not one hundred percent. So uh finally, from PPI to CPI, there you still have that. Big segment of wholesaler distributors. And this is where that uh pass through broke down. We have not seen. Hmm. 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, you know, vertical axis. The CPI change in March versus the on the X axis, the tariff increased by product.

• 9:53Speaker 04

  You actually would see negative correlation. And meaning that the more China exposed it is to that. To uh in that goods, actually, the more deflation you've seen. And we have seen that negative correlation he- held over the last three months. As well as for most of last year. Which suggests that there is actually another po- major part to this whole trade war price pass. Story, which is China is going through a deflationary spiral and domestic prices in China is very, very competitive right now. Um, so that's one element out of and I think broadly these

• 10:31Speaker 04

  three type of prices is uh consistent with your what we are seeing also in soft data. So in recent in recent days, we have seen from Richmond Fed, Philly Fed, and you know, 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 uh 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

• 11:16Speaker 04

  margins.

• 11:17Tracy Alloway?

  Yeah, 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, 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.

• 11:45Joe Weisenthal?

  By the way, yesterday, uh, April 22nd, in the newsletter, I spotlighted this gap between prices received and prices paid in some of those regional Fed surveys. And 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. Anna, okay, maybe the prices don't get passed on to uh 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?

• 12:28Speaker 04

  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. So we're expecting investment to significantly slow down in the second half of this year in response to lower profit, right? Everything on the investment side responds to profits.

• 12:58Joe Weisenthal?

  Yeah.

• 12:59Speaker 04

  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? So goods prices probably will be higher

• 13:44Speaker 04

  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,

• 14:29Speaker 04

  seeing deflation actually in March. And even in the S and 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.

• 14:58Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Shaun McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 15:13Speaker 05

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.

• 15:22Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 15:30Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 15:49Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 15:59Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 16:41Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads. That candidates quote must be willing to work extended hours and weekends as needed. One major perk for all that hard work employees access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:23Tracy Alloway?

  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?

• 17:56Joe Weisenthal?

  A substantial rollback. Yeah, great question.

• 17:59Speaker 04

  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 be ready to potentially get hit by tariffs? So an example is what we have seen in February and March in the import price data. I mentioned that almost 100% of the tariffs on China has been passed through at the US border.

• 18:41Speaker 04

  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 US 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. So 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,

• 19:26Speaker 04

  you know, in these models, when we think about how does a, a, a person make a decision, rational decision

• 19:33Joe Weisenthal?

  Uh huh.

• 19:33Speaker 04

  in the face of uncertainty, you calculate the risk neutral, you know, optimization equation. So it would be, you know, probability of a scenario, a tariff, uh, multiplied by the net cost. Uh, 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 one hundred percent. And because of that extremely high cost to that tail outcome, like suppose that there were further escalation between you as a China, now you, you know that the probability of tariffs uh, on China could potentially even go to two hundred percent if,

• 20:16Speaker 04

  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 i- in the risk neutral optimization, uh, given these high risk outcome, it, 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, oh, two hundred percent of the tariffs. And this is why there's, it's a high probability that, given the uncertainty and the time it takes to plan for

• 20:59Speaker 04

  the, the goods to be on the shelf in the fall, that I think is the high, high probability outcome that we'll have uh, empty shelves and uh, lack of varieties.

• 21:09Joe Weisenthal?

  I just have one last question. You know, we are in this sort of weird space where, you know, 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 like pretty normal and, you know, 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 Most, you know, the three of us anyway, by and large, life goes on. Although Tracy has received emails from various companies that she buys from.

• 21:40Tracy Alloway?

  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, we'll see what else.

• 22:03Joe Weisenthal?

  One thing about fake flowers, by the way, is that was one of Hong Kong's very first export industries was that they really, they like, they really like, yeah, they did. That was a huge, you know, then they eventually did high-tech things, but fake flowers was an early, was an early industry. They came to dominate. And one of those some random.

• 22:23Speaker 04

  Oh, yes, Joe. In fact, it was the bread and butter of the richest man in Hong Kong, Lee Ka Ching, got his, got his start with making plastic flowers.

• 22:34Joe Weisenthal?

  This is so great. I like have this random, random fact stuck in my head and I have you confirmed it. I don't know how you remembered that. And then you were able, the alley-oop there between me and Anna. Real quickly, holiday season potentially very damaged. But when would you say we start to see this in sort of either our day-to-day lives or at least in hard data?

• 22:55Speaker 04

  Well, I think anecdotally, it's already, these stories are filtering in. I mean, for anyone who will be having a broken AC system, especially a central AC system and come summer, you'll find that many of the parts are 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'll be more and more stories like that. In terms of the hard data, I think in the April, meaning next month,

• 23:32Speaker 04

  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. And I would, I think for now, for people who collect big data, so web scraping, I think.

• 23:52Speaker 04

  Uh, one could be scraping, you know, you know how on Amazon,

• 23:56Joe Weisenthal?

  Yeah.

• 23:56Speaker 04

  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 with that increasing.

• 24:12Tracy Alloway?

  Anna, you're gonna add to my already innate tendency to stockpile things. So, uh, thank, thank you for the advice.

• 24:20Joe Weisenthal?

  Anna, thank, 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 Odd Lots.

• 24:28Speaker 04

  No problem.

• 24:45Joe Weisenthal?

  Tracy, 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.

• 24:54Tracy Alloway?

  Oh, yeah.

• 24:54Joe Weisenthal?

  Cause like a really big business, you know, they can, you know, could lose money, right? For a quarter or two and go be, you know, continue for a while as a going concern. They're going to be small businesses that literally just cannot pay that tariff bill and that's lights out for them.

• 25:10Tracy Alloway?

  Yeah, I think I wrote about this in the newsletter a few weeks ago, but that seems almost certain to happen. And also, you know, the bigger businesses obviously do have some pricing power. They might have some ability to negotiate with their suppliers. Like 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, it is also very unsettling just to think that all of this is by choice, right?

• 25:38Joe Weisenthal?

  Yeah.

• 25:39Tracy Alloway?

  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, not a great time.

• 25:57Joe Weisenthal?

  Well, you know, I find it interesting that for years, uh, since I was a teen, culture work, the war on Christmas. This is a literal, no, for real, right? That we've been hearing that forever and Anna's talking about empty shelves over the holidays. What is that?

• 26:10Tracy Alloway?

  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?

• 26:24Joe Weisenthal?

  Let's leave it there.

• 26:24Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 26:30Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow Anna Wong. She's at Anna Economist. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashal Bennett at Dashbot, and Kell Brooks at Kell Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, 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/oddlots.

• 27:03Tracy Alloway?

  And if you enjoy Odd Lots, 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. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 27:53Speaker 07

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• 28:29Speaker 05

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