Our proxy for corporate profit margins, which is derived from the revised U.S. gross domestic product data for the first quarter, implies that margins remained essentially unchanged at 13%.
While elevated within the context of current trade policy, those margins will not be enough to absorb all of the increases in costs associated with tariffs once a modicum of clarity has been restored to the cost of doing business.
According to the Budget Lab at Yale, the effective tariff on imports was 17.8% before the U.S. Court of International Trade on Wednesday invalidated some of the tariffs, though a federal appeals court stayed that ruling until early June. Without the new tariffs, that rate would be 6.9%.
Wherever the effective tariff rate ends up, any reduction in margins because of the significant increase in trade taxes will result in reduced growth, higher inflation and rising unemployment.
In addition, it is important to note that a majority of small and medium size firms operate with much thinner margins than those reported in the GDP data, which relies on large multinational firms.
For example, many small and medium size firms in retail and restaurants typically operate with 5% to 7% margins, giving them little capacity to absorb the tariff costs.
Read more of RSM’s insights on the economy and the middle market.
In the first quarter, corporate profits declined by 3% because of a slowing economy and softer consumer spending. This easing implies that profit margins will narrow further as tariffs take hold.
Although many firms have the capacity to absorb tariff-induced pricing pressures, they are still going to pass along costs to preserve margins.
In the most recent RSM US Middle Market Business Index survey, 77% of executives said that they had paid higher prices for critical inputs. More than half, or 57%, said they had passed along price increases in the current quarter and 63% said they intend to do so over the next six months.
Now matter how one slices and dices the data, even with profit margins remaining elevated business will be passing along costs to consumers and that means higher inflation.
