Are Businesses Absorbing the Tariffs or Passing Them On to Their Customers?

A recent survey of businesses in the New York-Northern New Jersey region indicates that most firms have passed on at least some of the increased costs from higher import tariffs to their customers, with nearly a third of manufacturers and 45% of service firms fully passing along tariff-induced cost increases by raising prices. The survey, conducted in early May before tariff reductions on Chinese goods, found manufacturers reporting an average tariff rate of 35% and service firms reporting 26%, leading to cost increases of approximately 20% and 15%, respectively; however, almost half of businesses reported a decrease in their bottom lines as a result of the tariff increases. Businesses also expressed considerable uncertainty about the future path of tariffs, making business decisions and pricing strategies difficult.

Analysis

A recent survey conducted by the Federal Reserve Bank of New York in the New York-Northern New Jersey region reveals significant impacts from increased U.S. import tariffs on businesses. As of early May, prior to some tariff reductions on Chinese goods and certain court decisions, manufacturers reported an average tariff rate of 35%, a 25 percentage point surge in six months, while service firms faced a 26% average rate, up 17 percentage points. These tariffs translated into substantial cost increases for imported goods, approximately 20% for manufacturers and 15% for service firms over the same period. The majority of affected businesses—roughly three-quarters in both sectors—responded by passing at least some of these costs to customers, with nearly a third of manufacturers and about 45% of service firms implementing full pass-through via price increases, often rapidly, with over half doing so within a month. Despite these price adjustments, almost half of all surveyed businesses reported a decrease in their bottom lines. Firms also adjusted operations by increasing domestic sourcing, altering inventory levels (with about a third increasing them), and, particularly in the service sector, significantly reducing capital investment; nearly a quarter of service firms cut capital spending, compared to little net change among manufacturers. Compounding these challenges is considerable uncertainty regarding the future trajectory of tariffs, with businesses expressing difficulty in making decisions and determining appropriate pricing strategies under such conditions.

Key Decisions for Investors

• Investors should anticipate sustained inflationary pressures as a significant portion of businesses pass tariff-induced cost increases to consumers, potentially influencing monetary policy and investment yields.
• Scrutinize corporate profit margins closely, especially for companies reliant on imported inputs, as nearly half of businesses reported declining profitability despite raising prices, indicating that cost absorption is still prevalent for many.
• Differentiate investment exposure by sector, noting that while service firms more readily passed on full costs, they also exhibited more pronounced cuts in capital expenditure, suggesting varying levels of resilience and growth prospects compared to manufacturing firms which showed mixed capex responses.
• Acknowledge the high degree of uncertainty surrounding future tariff policies as a key risk factor, favoring companies with robust supply chain diversification, strong pricing power, or clearly articulated strategies to navigate trade policy volatility.