Category: business

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The rally in European aerospace and defence stocks has one notable laggard today:

Wee! And it all looked so promising at the open. Full-year 2024 results from FTSE 100-listed Melrose beat expectations and came with a five-years-out target for £600mn of free cashflow, which is about 20 per cent higher than the consensus.

As usual with Melrose, however, there’s a rather complicated mismatch between reported profit and cash.

Melrose posted an adjusted operating profit for its engines business of £422mn, but this included a “£274mn of total variable consideration” from Risk and Revenue Sharing Partnerships. The 2025 guidance includes another “variable consideration” of between £320mn and £360mn. By 2029 the VC rises to £500mn.

These are non-cash items, as we have discussed previously, and are a big part of the £544mn of adjustments that turned last year’s £4mn statutory loss into an operating profit.

Melrose said the 2024 variable consideration was “in line with our expectations”, but its guidance for future years was very much not in line with market expectations. The number was meant to go down, relative to total contract value, not up.

The way Melrose amortises profit on long-term engine contracts has long been a bugbear for the market. The stock having crashed 30 per cent over the 12 months to last October on worries around cashflow, Melrose hosted an accountancy teach-in and published a booklet, though it seems to no longer be online. (Update: link’s working now.)

Here’s the relevant bit:

[A]t the point we deliver our engine component we are required by IFRS 15 to record a proportion of future aftermarket income called variable consideration. This is due to a combination of specific contractual rights and the nature of our components in these partnerships, which typically last the lifetime of the engine.

The variable consideration, which is currently around a quarter of our overall RRSP revenue, effectively recognises or pulls forward a percentage of our future contractually entitled aftermarket income and treats it as revenue at the point of delivery of our components. In order to pull forward the aftermarket income, a rigorous assessment of future revenues and costs is made. This assessment draws upon OEM inputs and other market data for items such as expected fleet size, flight hours and cycles, frequency of shop visits and the expected profitability over the life of an engine.

Importantly, IFRS 15 requires us to ensure that any revenue pulled forward must be highly probable to not reverse at a later stage. As a consequence, any revenue pulled forward is risk adjusted and currently we record only 10% to 30% of available aftermarket income over the life of the engine, despite having substantially completed our work at the manufacturing stage. Our risk assessment considers a wide range of programme risks including the length of an engine’s life, potential programme cost pressures, and the cost of any additional development work. These assumptions are reassessed annually and, where appropriate, the prudence is unwound, resulting in a “catch up” addition to variable consideration being recognised.

Variable consideration creates a mismatch between profit and cash, since the cash is typically received at the point of the shop visit that takes place routinely, but often several years after a percentage of the revenue and profit is recorded. This mismatch is most acute whilst two of our 19 RRSP contracts remain cash negative and the gap is expected to be at its largest in absolute terms in 2024. Variable consideration leads to an increase in the unbilled work done asset in the Melrose Group balance sheet and this asset is expected to continue to increase as OEM deliveries grow, and the programmes mature, ahead of the rate of amortisation.

Sure, fine. But note the guidance in bold (our addition) where Melrose said it would only book “10 per cent to 30 per cent of available aftermarket income” over the engine’s life. From that, investors and analysts assumed the 2029 variable consideration would fall to about £350mn.

However, according to JPMorgan, the most important bit of the October teach-in wasn’t the up-to-30 per cent guidance, it was the word “currently”:

After speaking to management, we understand that ‘currently’ was meant to refer to the near-term (i.e. 2024-26). Thereafter, as new engine programmes mature and the risk profile drops, Melrose expects to pull forward over 30% of the future aftermarket each year. For example, to achieve VC of £500m in 2029, we estimate the pull forward is c36%.

What this means is, while 2029 expectations can move higher (as much as any analyst was looking that far ahead) the bigger than expected pull-forward of yet-to-be-earned aftermarket income is likely to make cashflow forecasts for 2025, 2026, 2027 and 2028 move lower.

It’s this kind of thing that makes Melrose a recurring feature on this blog.

Further reading:
— The great Melrose cashflow conundrum (FTAV)
— Breaking down the Melrose founders’ last big score (FTAV)

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Your guide to what the 2024 US election means for Washington and the world

While the Democratic Party expresses disapproval of the Trump administration’s wrecking-ball authoritarianism by wearing pink, investment banks have been seeking guidance from America’s stand-in opposition: conservative and libertarian think-tanks.

The Washington Strategy team at Jefferies invited Jessica Riedl of the Manhattan Institute and the Cato Institute’s Alex Nowrasteh and Ryan Bourne in for a chat. The subject was Doge, the Department of Government Efficiency, and whether there’s any truth to its claim to have saved $105bn through workforce reductions and contract cancellations.

TL;DR — no.

Key takeaways: 1) DOGE’s actual impact is less than $10bn; 2) DOGE cannot reduce spending passed by Congress; 3) Meaningful cuts would require reforms on entitlement programs.

Here, via Jefferies, is Cato Institute’s Doge strategy ready-reckoner:

1. Purging progressive influence: DOGE is being used to remove left-leaning personnel and policies from the federal government. This is evident in its exemption of security agencies, its focus on dismantling diversity programs, and its termination of probationary employees hired under the Biden administration.
2. Musk-style corporate restructuring: DOGE is applying Elon Musk’s cost-cutting playbook to the federal government, prioritizing workforce reductions despite personnel costs being a minor share of overall federal spending.
3. Public relations strategy for spending cuts: By spotlighting small-dollar programs, it may be using public misconceptions about federal spending to push a broader austerity agenda.
4. Legal challenge to expand executive power: DOGE is testing the limits of presidential control over federal spending, potentially setting the stage for a Supreme Court ruling that weakens legislative constraints around impoundment.
5. Political cover for fiscal policy: DOGE serves as a shield for congressional Republicans, allowing them to extend the 2017 tax cuts and expand the deficit while enacting only minimal spending reductions.

And for what? A $10bn reduction would be less than 0.2 per cent of the US fiscal deficit. Summing up Doge’s approach as “spending cut performance art”, the Manhattan Institute presentation puts true savings at “closer to $2bn, or 0.03 per cent of federal budget”.

Musk’s hand-wavy target of cutting between $1tn and $2tn by July 2026 remains in place, but even the $105bn it has claimed so far doesn’t stand up to scrutiny. Nor, if the idea is balancing the budget, does a strategy of lay-offs and contract cancellations make a lot of sense; not when social security, Medicare/Medicaid, veterans’ benefits, defence, and interest payments account for 75 per cent of federal spending.

Per Jefferies, in its note to clients:

Cutting 25 per cent of federal employees would save only 1 per cent of the budget, and eliminating USAID would only account for 0.6 per cent of the spending. A more practical target would be addressing payment errors, but it would yield only around $100bn in saving.

These figures are dwarfed by the scale of what’s required:

Under the current tax code and modest spending adjustments, the deficit is projected to rise from $2tn to $3.6tn in the next decade. If the US ever defaults on its debt, no external bailout would be possible, and the resulting economic shock would be severe. A key driver of rising costs is Social Security, largely due to demographic shifts—while five workers once supported one retiree, that ratio has fallen to three and is expected to reach two in the next decade. Some lawmakers acknowledge that adjusting Social Security would be necessary, but raising the retirement age or reducing benefits is politically costly.

Deporting people won’t work either:

Having the world’s reserve currency makes debt of 123 per cent of GDP just about tolerable. When it stops being tolerable is the issue. Jefferies puts forward the argument that significant cuts will have to come eventually.

The Cato Institute outlines possible ways to reduce the fiscal spending by as much as $2.4tn, including entitlement reform (Social Security and Medicare), eliminating corporate subsidies, ending federal aid to states, selling federal assets, simplifying the tax code to promote efficiency, and regulatory reform to spur growth.

Going by the constitution, Congress has sole responsibility for matters fiscal, so investors are at risk of paying Doge too much attention (though fans of democracy may feel they have little choice).

We’ve extracted the Manhattan Institute and Cato Institute PDF slide desks from Jefferies’ research. Shout at us by email if you believe that to be a problem.

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Earlier this week, the London Stock Exchange Group’s indexing business FTSE Russell announced some subtle but interesting changes to its rule book. Index methodology might not be everyone’s cuppa, but give it a try.

From September onwards, its various UK indices will admit companies with dollar and euro-denominated shares, rather than just the sterling-denominated ones permitted by the current regime.

FTSE Russell will also make it easier for companies to be admitted quickly into its flagship UK indices. Before, companies needed a £2bn market cap to be eligible for a “fast entry”, but this will be lowered to £1bn, and the relative ranking requirement will also be relaxed

Here’s the new wording of FTSE Russell’s Fast Entry Threshold rule:

If an IPO company ranks 225th or above based on the close price on the first day of unconditional dealings; and has an investable market capitalisation of GBP 1bn; then the company, if otherwise eligible, will be placed in the FTSE 100 or FTSE 250, as appropriate (ranking at or above the index review auto-include thresholds, of 90th or 325th, respectively), after the close on its fifth day of trading. Concurrently, the lowest rank constituent will be deleted from the applicable index and associated membership changes implemented.

Can these moves halt the LSExodus and restore the London’s capital markets vim of yore? No, obviously not. C’mon. The great stock market listing migration is driven by yawning valuations differentials and the multinational operations of many modern companies. Slight rule book fiddles aren’t enough to dent those forces.

Nor are these revolutionary moves. FTSE Russell will still require a company to be of “UK nationality” and be listed on the LSE to make it into the FTSE 100 or 250. At the moment there isn’t a single company that would be affected by allowing dollar or denominated securities to be included in the FTSE benchmarks.

FTSE previously did allow euro and dollar listings, but scrapped this in 2014 because “negligible exposure to non-Sterling traded securities at that time led to unnecessary currency risk within the derivative markets”. Companies could still list in dollars or euros after that, they just weren’t eligible for main market inclusion.

Even the new Fast Entry Threshold would only have affected 11 companies historically, and only three of them would under the revised rules have been eligible for the FTSE 100 at the time of their listing. (Royal Mail, Worldpay and ConvaTec).

However, it could help at the margins, and shows that the LSE is capable of moving beyond blaming the financial media and pension funds in its effort to regain its mojo. Moreover, it has plenty of other levers and knobs it could twist and pull that cumulatively might add up.

Speeding up index inclusion will make the process a bit more attractive to companies, and facilitating dollar and euro listings could potentially entice a few companies whose businesses are anyway international. As David Sol, global head of policy at FTSE Russell, said in the methodology review statement:

We regularly look at the methodology of our indices to ensure they continue to represent the underlying market and sectors. This includes our recent review of the FTSE UK Index Series, where the companies included are inextricably intertwined with the companies that list on the London Stock Exchange. Whilst there will be no immediate impact on the index composition, these two changes will give the FTSE UK Index Series a timely and more accurate representation of companies that can list in London today and in the future.

But for Alphaville the really interesting thing is how this once again highlights how tricky the indexing business is. The whole thing is a minefield of metaphysical questions.

What makes a “UK company”? As FTSE Russell points out in its accompanying FAQ, about 86 per cent of all revenues generated by companies in the FTSE 100 actually come from overseas. What makes a tech company? Amazon is often classified as a “consumer discretionary” stock, and therefore doesn’t appear in tech ETFs, while Meta and Alphabet do, despite being classified as “communication” stocks. Is Brookfield a Canadian or US company? It recently moved its headquarters to New York to secure US index inclusion, but its parent and centre of gravity remains in Toronto.

These are all super-nerdy, mega-niche questions, but in a world where benchmarks matter more and more, they can end up having a fairly sizeable impact.

Further reading:
— Index providers are massively dull — and massively profitable (FTAV)
— The index providers are quietly building up enormous powers (FT)
— ‘Volmageddon’ fine may hint to era of stricter index regulation (FT)

Nat Dyer is an author.

In December 1703, following a stunning English and Dutch naval victory over the French fleet, a well-connected and cunning English diplomat, John Methuen, convinced the King of Portugal to sign a trade deal. It eliminated tariffs for English woollen cloth entering Portugal and gave Portuguese wine preferential treatment in England. In the decades that followed, trade boomed between the two countries in both commodities.

This exchange of English cloth and Portuguese wine would become the stuff of legend.

The cloth and wine example was used by the stockbroker-turned-economist David Ricardo in 1817 to explain why freer international trade benefited all countries, as long as they specialise in what they make most efficiently. Ricardo’s principle of comparative advantage has been praised by generations of Nobel winning economists as one of the profession’s greatest insights. Paul Samuelson called it a “beautiful” and the “unshakeable” basis for international trade. Paul Krugman, while shaping the pro-globalisation consensus in the 1990s, wrote that Ricardo’s idea was: “utterly true, immensely sophisticated — and extremely relevant to the modern world.”

Ricardo has come in useful again and again. When, White House economist Greg Mankiw got in political hot water in 2004 for saying that offshoring American jobs was “probably a plus for the economy in the long run” he lent on the 200-year-old theory. As The New Yorker explained, economists still rely on Ricardo’s “extremely powerful” insight: the story of “England exchanging its surplus cloth for Portugal’s surplus wine, to the benefit of consumers in both places.”

 If only the public and politicians could grasp the counter-intuitive logic of Ricardo’s “difficult” idea, Krugman had suggested, then opposition to free trade would disappear. The problem, Mankiw wrote, was that the public were “worse than ignorant” about good trade policy.

Now, with Trump’s will-he-won’t-he trade wars and tariff brinkmanship, similar voices have been heard again. What we need in the age of Trump, economist Justin Wolfers, wrote recently — betraying a quasi-religious devotion — is “a sermon about Ricardian comparative advantage and gains from trade.”

Yet, curiously, too few economic theorists have interrogated the actual, messy history of trade.

Gold, cloth and chains

All major economic powers — Britain, Germany, and yes the USA, and China — rose to their position while protecting their industries with high tariffs. Even a quick look at economists’ favourite example of win-win trade between England and Portugal reveals a radically different picture.

As I describe in my book Ricardo’s Dream, the classic English and Portuguese exchange was about politics and power, not just economics. The naval victory, at the Battle of Vigo Bay in 1702, was so important because the ailing Portuguese Empire was caught in a geopolitical bind between the rising northern powers of England and France. John Methuen signed two military treaties with the Portuguese before he sealed the commercial deal. With the Cloth and Wine Treaty, Portugal bought not just products but protection.

The deal helped ruin Portugal’s own textile manufacturing, as Methuen predicted, and even its increased port exports left a huge trade deficit with England decade after decade. The trade between the two countries was balanced with a commodity almost never mentioned by trade theorists: gold from Brazil.

The Portuguese had struck gold in its South American colony in the 1690s. The Brazilian Gold Rush lasted most of the 18th century and doubled world production. More than half of this gold ended up in London (enriching, among others, Sir Isaac Newton). The gold flows were no secret. Even Adam Smith, Ricardo’s fellow classical economist, wrote: “Almost all of our gold, it is said, comes from Portugal” or more accurately from “the Brazils”. And, yet, the connections are rarely made.

 One more product, excluded from the conventional story, comes into view when we look at how the gold was mined. It is a product no longer legally traded: human beings. Brazil’s gold rush relied on huge numbers of enslaved Africans, transported in chains across the Atlantic. Brazilian gold supercharged the transatlantic slave trade and, as contemporaries observed, turned the West African Gold Coast into a “slave coast”.

That’s not all. Much of the English cloth — in some years around 85 per cent — that landed in Portuguese ports was re-exported to Africa to be exchanged for captive men, women, and children. In the global historical view, the trade in English cloth and Portugal wine appears to be an appendix, and facilitator, of the transatlantic triangular trade.

But, Ricardo’s famous model excluded questions of power, empire, and exploitation from the beginning. As Matthew Watson, professor of political economy at Warwick University, has written, Ricardo’s theory is “a mathematical facade behind which the actual historical social relations of production of the real England and Portugal are deliberately taken out of the equation”. These are “explicitly oppressive social relations of production based on slave labour and the imperial policing of national hierarchies”. Those who hold on to the old story of English cloth and Portuguese wine have the wool pulled over their eyes.

 Of course, other episodes of international trade paint a much rosier picture: of how trade has expanded peoples’ worlds, their access to products, and the flow of news and culture. Yet, the English and Portuguese history does fit into a pattern of so-called unequal treaties that Britain imposed on nominally independent states — such as Siam (Thailand), China and Persia — in the 19th century. The political economist Ha-Joon Chang has written that this first period of economic globalisation was “‘made possible, in large part, by military might, rather than market forces”.

The backlash

In the 1980s, fears of the rise of a new protectionism pushed policymakers to create a vast web of bilateral, regional, and global trade agreements. Political parties whether on the right or left embraced a very specific type of globalisation, which was sometimes seen as a universal law akin to gravity. “Free trade” became a dogma that was used, in part, to tilt the global trading system in favour of large multinational corporations and Wall Street, giving them new rights and powers and plumping their profits. CEO pay skyrocketed while regular, working people often lost out, for example, the millions of Americans who lost their livelihoods with the China Shock — after China joined the WTO in 2001 and flooded the US with cheap products.

All the while, economists touted the benefits of trade as long as their models showed that the winners could theoretically compensate the losers, regardless of whether it happened or not. Another aspect excluded from economists’ models was global power competition, making them increasingly less relevant to a political class fixated on a resurgent China. 

Fuelled in part by the backlash to globalisation, Donald Trump won the White House and is now back for a second time. He has made good on his promise to turn away from free trade surrounding himself with advisors such as, Peter Navarro, who has argued that: “Ricardo is dead!” Navarro, of course, is not worried about how the West exploited the wealth of its formal and informal colonies but how in the 21st century the USA has, in his eyes, been unfairly taken advantage of by China’s state capitalism. America’s turn to tariffs is a recognition of its fragility, not strength. Progressives will disagree with many of his solutions, but Navarro is surely right that “the economics profession must do a much better job than David Ricardo of modelling trade in the real world.”

 Now, Trump is speaking loudly and hitting allies and enemies alike with a big stick labelled ‘tariffs’. He has mobilised a real, justified complaint against hyperglobalisation to promote a highly divisive and potentially damaging policy. Along the way, he has made the power and politics of trade policy, so often concealed or denied, plain for all to see.

 The constitutional wrecking ball of Trump’s first few weeks of his second term have rightly outraged many. But on the issue of tariffs, a desire to return to the ”old Ricardian verities” and argue that they are always and everywhere bad is a road to nowhere. Trying to counter Trump with ‘fairy tale’ economic theories that helped fuel his rise is like trying to put out a house fire with matches. Opposition to Trump’s harmful and damaging policies requires a more solid footing.

 We need a new, genuinely progressive economics with its eyes focused on the real world and its history, rather than abstract models built on unreality. This has begun to emerge in the past decade. There is a growing acceptance that whether tariffs are good or bad depends on context, that there is a difference between targeted and across-the-board tariffs, and that new forms of protectionism could reduce inequality or ecological destruction.

 Much turns on whether economics can continue to evolve into a field of study that is, to borrow a line, genuinely true, sophisticated, and relevant to the modern world.

@natjdyer.bsky.social

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Dataviz was more-or-less invented in the back half of the 18th century by William Playfair, who was born near the village of Liff just outside Dundee.

If you’ve not read his Wikipedia entry, do. There’s murky spycraft, counterfeiting, extortion, propaganda, sibling rivalry, land speculation, a bank run, a debtor’s prison, and a cameo at the storming of the Bastille. Playfair’s life is among the most interesting ever lived, and what survives of him is charts. There’s a lesson in that.

In honour of Playfair, these are this week’s lines:

Email us your guesses for what those lines represent, remembering to put QUIZ in the subject line. One correct entry will be drawn at random for the prize of an exclusive FTAV quiz-winner T-shirt.

We usually name correspondents who get all the answers so if you don’t want that to happen, or would rather we use a pseudonym or whatever, be sure to tell us. The deadline for entries is Monday’s first light over the Bracken House roof garden and the judge’s decision is final.

Ajay Rajadhyaksha is global chair of research at Barclays. Micheal McLean is a public policy analyst at the bank.

After two years when the US economy seemed to thump everyone else, the narrative is starting to shift.

US stocks are now negative for the year (and are getting hammered by European equities!) the dollar rally has stalled, and bonds have rallied. And this isn’t just a market tantrum; data have started to soften too. The latest bit of bad news was yesterday’s ISM reading, soon followed by more bad tariff news.

The Atlanta Fed’s GDP tracker now suggests a 2.8 per cent economic contraction in the first quarter, after disappointing retail sales, personal spending, consumer confidence and manufacturing data. The nowcasting model has probably been skewed by a surge in imports ahead of tariffs coming into force, but we’re clearly seeing an economic slowdown, which could morph into something more malign.

However, the economic bulls can push back with one simple argument — look, new tax cuts are coming!

After all, the signature legislative accomplishment of the Donald Trump’s first term was the large tax cut in the Tax Cut and Jobs Act (TCJA) of 2017-18. And in recent months, the president has promised not just to extend the expiring TCJA but also to give new tax cuts on tips, overtime pay, Social Security earnings, SALT relief, etc.

Moreover, the House just passed a budget resolution, the first step to a budget reconciliation bill. The Senate has also gotten into the act, with Majority Leader John Thune calling for not just extending the TCJA, but making those cuts permanent. Even if the economy is softening, it seems only a matter of time before Congress rides to its rescue.

Except — the reality on the legislative ground is a little different.

Consider the just-passed House budget resolution. This isn’t a tax bill; it’s a framework that lays out targets for tax cuts ($4.5tn) funding increases ($300bn, mainly for immigration enforcement) and spending cuts ($2tn). Individual committees in the House are then supposed to hit those targets. For example, the Energy and Commerce committee (which oversees Medicaid spending among others) is supposed to come up with $880bn in spending cuts.

Based on this budget resolution, the House can add $4.5tn to the deficit via tax cuts. But House committees have to also come up with $2tn in spending cuts. The original draft didn’t include so many spending cuts, but Republican fiscal hawks on the Budget Committee insisted that they would stop the bill unless those were added. Crucially, every dollar below $2tn gets offset one-to-one by a dollar lower in tax cuts.

Add it all up — $4.8tn in tax cuts and border funding increases and $2tnn in spending cuts elsewhere — and Congress is aiming to increase the deficit by a maximum of $2.8tn. All these numbers are over a decade — from fiscal year 2025 to 2034.

But here’s the problem.

The Joint Committee on Taxation (JCT) estimates that simply extending all expiring tax cuts will add $4tn to the deficit over a decade. But extension is simply a continuation of the status quo — just ensuring that today’s tax bills don’t go up next year. Meaning no new fiscal stimulus. And yet, the current budget resolution targets deficits of $2.8tn. In other words, Congress (currently at least) is not only not planning for large new fiscal stimulus; it is at present targeting a $1.2tn fiscal drag.

There’s also the question of where the $2tn in spending cuts will come from. The Energy and Commerce committee is supposed to come up with almost half these cuts. Medicaid cost the US government $912bn last year and provided health coverage to 67mn people. The natural assumption is that this is where there will be large spending cuts, simply because that’s where there’s large spending.

But the president has ruled out major cuts to Medicaid (in addition to Social Security and Medicare), which begs the question — how do you find $2tn in spending cuts given that defence, interest costs and the troika of Social Security + Medicare + healthcare (Medicaid, Children’s Health Insurance Program and the Affordable Care Act) is what the US government spent almost all of last year’s $6.9tn on?

Separately, what about the new tax cuts that the president has promised? The non-partisan Committee for a Responsible Federal Budget estimates that to fund all of Trump’s tax wishes could add as much as $11.2tn to the deficit over the next decade. A far cry from the $2.8tn deficit increase — and even that just passed the House with the barest 217-215 majority.

In recent days, the Senate has suggested making tax cuts permanent by amending the budget resolution so the Congressional Budget Office (CBO) and Joint Committee on Taxation is told to consider current policy, not current law when ‘scoring’ the bill. This is sausage-making at its finest. Basically, the CBO/JCT no longer has to account for the $4tn or so that it would cost to extend the tax cuts, if the “current policy” guideline is used.

But this is semantics. It doesn’t change the fact that the deficit will still go up by trillions simply if TCJA is extended. Republican House members worried about the deficit still know that the debt clock will rise at a worrying pace — telling the CBO to ignore it doesn’t change the numbers. Notably, the idea of using current policy was also considered at the time of writing the House budget resolution, but didn’t garner enough political support.

There’s one final wrinkle to consider. The assumption we’re making is that all these numbers are over a decade — because that’s what the current language specifies (and a 10-year window is the usual protocol). But the House budget resolution could theoretically be amended so that deficits go up by $4.5tn over (say) five years instead of 10. If so, it opens the door to large new tax cuts.

But that approach also has major problems.

First, if $2tn in spending cuts are incredibly difficult to manage even over a decade (given that the US doesn’t want to touch all the things it actually does spend money on), it’s virtually impossible to squeeze into five years.

Second, if the fiscal hawks are worried about adding $2.8tn to the deficit over a decade, presumably they will be even less thrilled about doing the same over five years.

Markets cheered a few days ago when the House passed the budget resolution. But it doesn’t actually provide for net new stimulus. And there’s a long way to go — and many hurdles to overcome — before it comes close to becoming law. So no one should expect large fiscal stimulus to cushion any looming economic setback.

Letter in response to this article:
Federal VAT could cut the deficits better than tariffs / From Nic Hein, Washington, DC, US

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Won’t somebody please think of the children? Specifically about tariffs’ effects on their parents’ pocketbooks??

The US is putting 25-per-cent tariffs on goods from Canada and Mexico starting on Tuesday, along with another 10 percentage points of tariffs on China. That news was big enough to overshadow the Trump Administration’s weekend promise to create “strategic reserve” for alt-coins. (That’s another post.)

For those of us who have only looked at economic policy after the 1930s, a tariff is a levy on goods coming into the US. If commodities are priced on the margins (they are) and if companies pass on their cost increases to customers (they mostly do), tariffs start looking like pieces of paper that says “Make Prices Higher” for everything that’s imported, or that’s made of imported goods.

That’s a lot of stuff, especially because this round of tariffs is aimed at Canada, China and Mexico:

Financial markets made it clear that investors do not love this. Stocks fell sharply, and retailers’ shares were hit, with Dollar Tree down 5.6 per cent and Dollar General off 3.1 per cent. This is presumably because the US executive branch’s Make Stuff More Expensive Plan, if it persists, will mean Americans won’t be able to buy as much stuff.

While this bodes poorly for automakers, as MainFT has covered in depth, there’s a decent chance that prices won’t rise immediately on durable goods. This is because producers seemed to use that extra month of tariff delays to rush imports of inventory and materials. As an aside, Jason Furman had a helpful explanation today about why that boost in imports is probably dragging down the Atlanta Fed’s GDPNow figure into spooky recession territory.

But for our US readers who like to eat healthy, or have children, there is a more urgent concern: Tariffs on fresh produce, like berries, which can not be ordered in bulk and held in a warehouse for months.

Kids love berries. Berries are already expensive. Most kids love strawberries. And Mexico was the source of nearly 99 per cent of imported strawberries available in the US in 2022, according to the latest data from the Census Bureau.

While the US has a pretty robust domestic strawberry-growing business, imports still made up nearly 19 per cent of available supply from 2018-2020, according to the USDA.

For all berries that aren’t strawberries, we get about 51 per cent of our imports from Mexico and Canada, according to the Census Bureau.

A whopping 62 per cent of available blueberry supply was imported in 2018-2020, according to the USDA. While blueberries are imported from a wider range of countries, roughly a third came from Mexico and Canada in 2020:

In other words, we’re talking about a 25-per-cent price increase on roughly one-fifth of available blueberries and strawberries in the US.

For vegetables — equally important for kids, if less loved — nearly 70 per cent of imports come from Canada and Mexico. (This is going by the somewhat puzzling NAICS category that excludes potatoes, sugar beets and corn, but includes melons.)

Again, fresh produce markets are fundamentally commodity markets, meaning they’re definitely priced on the margins. Because of this, it’s tough to argue the tariffs won’t matter for prices at the grocery store.

These unfriendly maths could also help explain US President Donald Trump’s decision to take another step towards agricultural autarky Monday, with this post threatening tariffs on exports of agricultural products.

But there are pretty clear problems with any US attempt to fully replace some of that supply . . . for example, the blueberry-growing seasons in Michigan or Oregon probably don’t extend through January and February, when it is summer in Peru.

To take a step back: US officials keep saying they want Americans to have more kids. If so, it could help to make it a little less expensive to do that. No need to worry about car seat requirements! It’d be fine to just avoid unnecessary berry price increases. We might be able to put chicken coops in our backyards, but growing berry bushes is a different matter altogether.