Page 27 - BusinessWest March 17, 2025

During Costco’s last quarterly earnings conference call, CFO Gary Millerchap discussed the company’s plan to deal with tariffs and the potential effect on their customers. Pre- dicting the impact is a challenge, he said, because of the “uncertainty around the timing and scope” of the tariffs. As part of its plan, Costco has been pulling inventory forward — in other words, adding excess inventory in anticipation of prices rising in the future.
The tariffs being levied on exporting countries by the Trump administration are a headwind for many businesses and routinely discussed by CEOs and CFOs of major compa- nies. A tariff is a tax on a foreign country, a tactic to help gen- erate greater tax revenue for the U.S. from countries where there is either a trade imbalance, an adversarial relationship, or — in the case of our neighboring states, Canada and Mexi- co — to curb illegal drug trafficking.
Most economists agree that tariffs will ultimately result in higher prices for the consumer. Walmart issued a cautious outlook on its last conference call. John Rainey, the CFO, told analysts there are too many uncertainties related to consumer behavior and global economic and geopolitical conditions to give clear guidance to analysts — a nice way of saying “we have no idea what the tariffs might mean for the global econ- omy.” The stock price fell nearly 11% following the earnings report.
When companies like Walmart and Costco import, the tariff gets passed on to them, which gets passed on to the con- sumer. The Trump strategy is tricky at a time when inflation remains stubborn. At the last meeting of the Federal Reserve in January, the Federal Open Market Committee left interest rates unchanged, pausing the rate-cutting cycle that started last September because inflation remains elevated. Continu- ing to cut rates would put additional upward pressure on pric- es. Tariffs may exacerbate that dynamic further.
The Tax Policy Center, an independent think tank, esti- mates that tariffs would reduce imports by $9 trillion over 10 years. Currently, imports are at the highest level in history; the
U.S. imported about $4.1 trillion in goods in 2024, up 20% from 2021, and have increased by 6% annually, on average. A decrease of $9 trillion, spread over a decade, would be about a 25% decrease in imports per year. Presumably, goods pro- duced domestically would replace those that are imported, but such a transition doesn’t occur overnight.
So, what does this mean for the U.S. economy? Increas- ing inventories by retailers, as a measure to protect against higher prices related to tariffs, might be coming at the exact wrong time. From Costco’s conference call, the CFO noted that recent shopping habits have trended more toward lower- priced groceries, and the company saw a shift to more food eaten in the home. The CEO, Ron Vachris, suggested that cus- tomers have been making more pragmatic choices in recent months.
Such behavior is consistent with recent consumer surveys, which illustrate more cautious spending by individuals and families. Higher inventories, or supply, and weaker demand will soften inflation without any help from the Fed’s monetary policy.
Prices matter. The most Googled economic term in 2024 was ‘inflation.’ Costco and Walmart have the wherewithal to manage through uncertainty, but we, as consumers, may not. What we spend accounts for 70% of GDP; what we import accounts for 14%. It is not difficult to see how the U.S. econo- my could tip into recession if those two categories contract.
At a recent meeting of the Economic Club of Chicago, Doug McMillon, the CEO of Walmart, told an audience he expects the situation to worsen with increased price pressure ahead amid shoppers already experiencing “frustration and pain.”
Time will tell if that pain will be worth it for the long-term financial well-being of our country. BW
Jeff Liguori is managing partner and chief investment officer of Napatree Capital, with offices in Longmeadow and Westerly, R.I.
“Increasing inventories by retailers, as
a measure to protect against higher prices related to tariffs, might be coming at the exact wrong time.”
JEFF LIGUORI
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