Tariffs, Inflation and the Economy Explained

Guest: Lauren Saidel-Baker, Economist & Sr. Consulting Speaker, ITR Economics

In this episode, Lauren unpacks today’s economic trends — from tariffs and inflation to labor challenges — and why ITR remains optimistic about future growth. Plus, what businesses should know about a potential 2030s downturn.

Sean Riley: You are listening to UnPACKed with PMMI, where we share the latest packaging and processing industry insights, research, and innovations to help you advance your business. Hi, and welcome to UnPACKed with PMMI, I'm your host, Sean Riley. On today's episode, we welcome economist Lauren Saidel-Baker of ITR Economics, and she unpacks today's economic trends from tariffs and inflation to labor challenges. She also explains why ITR remains optimistic about future growth, plus what businesses should know about a potential 2030s downturn. Let's have a listen. So, with all the fancy introductions out of the way, welcome to the podcast, Lauren.

Lauren Saidel-Baker: Thanks so much for having me.

Sean Riley: Oh, the pleasure is all ours. So, you were pretty bullish about the economy during your talk at PMMI's ELC. How is ITR, or why, I guess, is ITR so confident in the US and the global economy, given all the uncertainty we're hearing surrounding tariffs and the roller coaster that is the stock market?

Lauren Saidel-Baker: Yeah, it's been a roller coaster even since I was with you all. We seem like it's not even daily, it's almost hourly that we get news and rollbacks and causes of tariffs, new announcements, but as an economist, and specifically as a business cycle economist, my job is to look through that noise, to look at the broader swings of what fundamental factors really move economic data, not just how do we feel about it. So, I'll be honest with you, I'm not comfortable being an optimist; that is not my happy place. Usually, economists get into this job because they are pessimistic people. So, to be saying, still no recession indicators on the horizon, I will admit the chances of a recession probably have grown with all of this tariff uncertainty, but that still isn't the base case, they haven't grown enough to really be, especially the overwhelming likelihood of what happens, and the number one factor behind that all is the US consumer. We have a very tight labor market still today, that means that more people are employed, wages are rising, and critically, wages are rising at a faster pace than inflation. So, at the end of the day, our median consumer is in a better position; they're better off today than they ever have been in history, which means they have more money to go out and spend. And our economy is built on consumer spending, about two-thirds of GDP comes from consumer expenditures. So, that's a really stable foundation for the broad majority of economic activity.

Sean Riley: Interesting. Now, I thought, and this may have changed since then, that when you were talking about tariffs and where the administration would land finally on tariffs and which ones would stick and which ones wouldn't stick, that they would be inflationary.

Lauren Saidel-Baker: Yes.

Sean Riley: Is that something you can elaborate on?

Lauren Saidel-Baker: Tariffs are inflationary. What percentage? Is it 145%? Is it only 30% on China? Who knows what we'll get tomorrow on whichever country? But any amount of tariff does add to pricing because you're not going to rewrite supply chains overnight. So, if we wanted to bring that production back on shore, we would need to keep importing at those higher costs for some amount of time. And then, let's say just for the sake of argument, say we did bring that production back, that's typically costly, we don't have a lot of excess capacity just sitting here in the United States waiting to be put to work, so we would need a lot of time to build those new factories, build those new facilities, a huge amount of investment to take place. Even if we were able to find people to staff these facilities once they were built, that would probably come at a higher labor cost. So, all of these trends together mean that tariffs do tend to increase pricing overall. Now, our forecast was already for inflation to start coming back up in the second half of this year. I know, what was it yesterday? We just got an inflation print that was a little bit lower than expected, 2.3% on the consumer price phases, we're not seeing inflation immediately, it's going to take some time for those mechanisms to work through, but once we do start to get rising inflation again in the second half of this year, I want to be clear that's not just for tariff related reasons, yes, tariffs are adding on top of that, but those fundamental factors, the liquidity measures that we see, things like velocity of money, things like treasury issuance, those factors have been in place for years now in some cases. If we could just wave a magic wand, remove all tariffs tomorrow, that doesn't mean that pricing necessarily stays at today's level.

Sean Riley: Okay. So, is anything positive that can be taken from the tariff situation?

Lauren Saidel-Baker: Oh, absolutely, there are winners beyond losers.

Sean Riley: Really? Oh.

Lauren Saidel-Baker: And tariffs, all they do is skew incentives, right? So, some folks are going to be in a much better position, those domestic producers. Now, they're also dealing with, I won't call it losses, but maybe complexities, because their inputs are probably not all made in America, and even their immediate suppliers are probably getting some things from overseas, so they still need to be watching their own margins. But tariffs should give them a little bit more buffer to take more price, to really pad margins in, especially in the short term, if they choose to, if they go that route. But it does tend to protect domestic manufacturers a little bit more. So, all tariffs are doing is they're skewing incentives, yes, they're introducing more complexity into the supply chain, but for some folks, that is a plus, that will be a win.

Sean Riley: Very interesting. So, you've touched on the workforce a little bit, and you touched on it at the ELC when you talked about it, and especially manufacturing, we're dealing with a complete workforce crisis. There's just not enough people to fill the jobs, which is why I found the whole tariff re-shoring thing very interesting because there aren't enough people here to do it to begin with, but that's a conversation for another day. Are there any ideas that you have, or anything you could add on how to solve or adjust to the labor issue besides higher wages?

Lauren Saidel-Baker: Yeah, higher wages are the easy one, I'll steal someone away from the competitor across the street, that's very much a race, right? To provide benefits, higher wages. Beyond that, I like to get hypothetical, how could we solve this workforce crisis? The easiest answer right now is to get in our handy time machine, go back 20 years, have more babies then, because now they'd be aging into the labor force.

Sean Riley: Exactly.

Lauren Saidel-Baker: If we don't have a time machine, how else can we get more people? Immigration is a good solution. Today, there are about six and a half million job openings, and legal immigration is hovering at about 1 million legal immigrants per year, so that's not going to solve the problem unless we really increase the numbers, probably not likely under this administration. So, for each business, if you can't adjust the sum total, I personally can't increase that pool of labor. I can pay more, my company is in a better position relative, but I can also innovate, maybe invest in some machinery, some technology, robotics, maybe AI... There's probably something you could do to be a little bit more efficient. Again, that does cost money, I'm not saying this is a free way to get more people, but if you can do with one person what maybe it used to take two people to do, that can help. Even just having better tech, right? Better equipment at your facility, even if you don't get those efficiency gains, which you should, maybe that makes your place a better place to work. So, that in itself will attract some people, I don't have to do the heavy lifting, I have a co-robot who's going to do the heavy, dangerous, dirty stuff for me. So, I think that investment is starting to pick up pace for watching things like material handling, but we're also just looking at that kind of business investment. Rates have come down from their peak, so maybe the cost of capital makes it a little bit better to do an investment today, even if I have to borrow to make that investment happen. We're starting to see those gears turning, yes, tariffs and uncertainty throw a wrench into the works. But at the end of the day, this is usually the time in the business cycle when we'd expect to see that pick up pace.

Sean Riley: You alluded to this earlier, you suggested that consumers are in a good situation right now. Why doesn't it feel like it? Why that despite consumer sentiment, you're saying consumers are actually better off than they have been in years, but yet that's not what we're hearing, that's not necessarily what it feels like at home?

Lauren Saidel-Baker: That's the biggest question I have as an economist. And here's where I do a deep look into myself, I say, all of my data says one thing, why don't people feel that? I'm an economist because I don't deal with the touchy-feely; I don't deal with people and sentiments and emotions. It turns out that sentiment is historically a pretty terrible leading indicator for consumer spending; people just are self-actualized. So, yes, things feel bad right now, and that doesn't mesh up with something like incomes, especially real incomes, inflation-adjusted incomes. Where consumer sentiment does tend to correlate a little bit more is in stock prices. So, maybe our sentiment is not taking a holistic look at our position; it's just looking at what my portfolio did the other day. It's interesting to see what maybe drives us a little bit more, do we read the headlines? Do we get bogged down in all of this uncertainty? Even if at the end of the day the result isn't really bad. So, the good news is sentiment does not directly lead to spending, we can see sentiment go down and not have that pullback in retail sales, and we certainly at ITR do not expect a pullback in retail sales, but I think part of it is just adjusting to new realities. Inflation has not been a concern for more than a decade, we got very used to going into the grocery store, seeing prices on the shelves the same, year in year out. So, adjusting our brains to this more inflationary environment, this new reality, that's taking some time, it's taking some adjustment, it's not a comfortable place to be.

Sean Riley: That's very interesting. I'm still not sure from a feeling standpoint. I still see that everybody doesn't seem to be that thrilled.

Lauren Saidel-Baker: Well, that's fair, that's absolutely fair, and we're also at a unique business cycle itself with something like inflation being a bigger component that affects different segments of the income distribution very differently. That really pinches low-income earners, middle to upper-income, they're a little bit more insulated just in any inflationary cycle, let alone this one. So, we can always find those cases. There are pockets of our consumer segment that really are feeling the pinch. So, I don't mean to generalize and say no one is in any trouble, what I'm saying is our median consumer is better off today. So, we'll still get the cases, trends in certain pockets, those catch our attention, that's just human nature.

Sean Riley: Yeah. Okay. Let's move a little bit to the industrial economy. It kind of remained flat in '23 and '24, new indicators suggest positive increases are expected in the coming year and going forward, could you just talk a little bit about why that is?

Lauren Saidel-Baker: This was a weird recessionary cycle in that it was just barely recessionary, we barely dipped below zero on that [inaudible 00:11:33] basis. So, the good news is we didn't have too far left to climb, it was much flatter than an outright pullback, we didn't dig a big hole that we have to climb out of. Now, that said, this sluggishness, it's also creating, I think of it like inertia, just this has been nothing to write home about, we've been slogging through. That also means that this type of cycle is not going to be just a snap back; it's not going to be, they call it sometimes like a V-shaped recovery.

Sean Riley: Right.

Lauren Saidel-Baker: This won't be linear, it's not going to feel smooth, it's going to come in these sluggish, low starts. And so, the second half of 2025, it's going to look a lot better than the first half, but not in this linear improvement way, it's a slow ramp-up before we really catch the wind in our sails, and see that takeoff. That's why I think even on the CEO sentiment side, business sentiment, that is lacking right now, rates, they came down, but not that much, we're seeing some benefits to some domestic producers from policies. But when Trump was elected, the policies we thought we would get, that was going to be tax cuts, that was going to be decreased regulation, instead, what do we get? Tariffs are something that complicates our supply chain. So, we have all of these hurdles that businesses are working through. They are working through them, but it isn't just an immediate answer; we're not getting immediate results.

Sean Riley: I've been listening to ITR talks for years, probably over a decade, and I've been hearing this, that you guys are predicting a major negative economic event we'll call it in the 2030s.

Lauren Saidel-Baker: Yes.

Sean Riley: And I fear asking this question, but is that still in the forecast, and what, if anything, can we do to prepare?

Lauren Saidel-Baker: I'll go ahead and say the word, it's a depression.

Sean Riley: Wow.

Lauren Saidel-Baker: We do not expect a recession, depression with a D. This is the big one, this is the doozy, it is still coming for us right around 2030. The causal factors haven't changed, so the timing really hasn't changed; this is going to be a global event, a very prolonged event. There still is upside, it's still too soon to batten down the hatches, I don't want anyone just crawling into their bunker quite yet. Make hay while the sun shines for the rest of this decade. We do have some great luck to come, but then have a plan in place, protect yourself on the way down, because I do see this as an opportunity at the end of the day. Like I said earlier, none of us as individuals can avert this thing from coming, this depression from happening, but you can put yourself in a relatively better position. So, ride out that downside, protect yourself as best you can, and just be ready to buy at the low. This is going to be the greatest wealth-generating event that either of us will ever see in our lifetimes. So, if you can really be positioned to take advantage of that, when things look the bleakest, I know this is where sentiment is really going to hurt us, things will feel terrible, the sky is falling, the world is ending, but buy at the low, you're going to be very well positioned on the way back up.

Sean Riley: Fair enough. I've taken enough of your time. I want to thank you, Lauren, for coming on here and giving us the details on what the economy's going to look like.

Lauren Saidel-Baker: It's been a pleasure, thanks for the conversation.

Sean Riley: Thanks for listening to this episode of UnPACKed with PMMI. If you liked what you heard, be sure to follow or subscribe on Apple Podcasts, Spotify, or wherever you listen so you won't miss any of the industry insights coming your way. While you're there, we'd really appreciate a rating or review. Want more? Visit pmmi.org/podcasts for all of our past episodes and additional resources. Thanks again for tuning in; I'll see you next time.

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