The Impact of Tariffs on Our Region's Firms

Introduction

Given recent changes in U.S. tariff policy, we asked Fifth District firms how they expected to be affected by tariff policy in March. At the time, 80 percent of respondent businesses expected to be impacted. In our May surveys, we checked in with firms and found that 72 percent of respondents made business changes in response to tariffs on imports. Firms reported taking a variety of actions. Of the firms that reported making adjustments, most have or plan to increase prices, 47 percent have canceled or delayed capital expenditures, and 41 percent have adjusted hiring plans.¹

Most Firms Have Adjusted Operations in Response to Tariffs

In our May surveys, we asked Fifth District businesses if they made or planned to make changes to their business due to recent tariffs on imports. Seventy-two percent of businesses reported that they had. This share was larger among manufacturers (88 percent) than among service sector firms (66 percent).

Among firms that reported making changes to their business, the most common actions taken were related to pricing, as firms either planned (64 percent) or implemented (37 percent) price changes. Firms also indicated delaying or canceling capital expenditures (47 percent), moving up purchases (47 percent), and changing their hiring plans (41 percent).

Planned price increases were the most cited change for both manufacturing and services firms that reported making at least one change, but manufacturers were more likely than service providers to plan price changes (79 percent versus 56 percent). Manufacturers were also more likely to have already implemented price changes (49 percent versus 32 percent). Additionally, manufacturers were more likely to have found new suppliers, both domestic (35 percent) and foreign (32 percent). Importantly, finding new suppliers was not an option for every firm. For example, one Maryland manufacturer highlighted that "Machine tool frames are forged in China, [there is] no forging capability in the U.S." In addition, this firm noted that "We will work to pass along price increases to commercial and U.S. government customers. We have changed sales contracts to make it clear tariffs will be passed along to customers."

Many firms also noted that uncertainty surrounding tariff policy has made it difficult to plan. According to a Virginia pet grooming service, "All businesses will remain in a realm of uncertainty until the situation with tariffs is more stable." Decision-making with respect to changing supply chains is also difficult. As one North Carolina Electronics Manufacturer put it: "Uncertainty has led many [Original Equipment Manufacturers] and ... retailers ... to hit the brakes on bringing finished product into the U.S. ... Even if it were possible to reshore these sophisticated supply chains, who will make that investment given the level of uncertainty faced by business?"

Firms are Taking a Multifaceted Approach in Response to Tariffs

Interestingly, to the extent that firms took action, they reported making multiple changes in response to evolving tariff policy. In fact, for those that took action, only about 16 percent reported taking one action, while 84 percent reported taking two or more actions. This was especially true among manufacturers, of which 91 percent that took action made two or more operational changes to address tariff policy. Nearly 30 percent of manufacturers reported taking five or more actions. As one North Carolina electronics manufacturer put it, "[Tariffs] will raise our input costs. We will need to raise our prices then because our margins are thin. We have also had to invest in inventory, which has constrained our ability to invest in capital improvements." A South Carolina transportation equipment manufacturer described their situation: "The high levels of uncertainty created by ... tariffs [have] caused our business to control things we can control (radical cuts to available capital, hiring freezes, layoffs, increase prices to customers without long-term agreements) and prepare to shift resources to tariff responses ... identify domestic and alternative international sources."

Conclusion

Data from our May business surveys suggest that most firms in our region are taking action in response to tariff policy. The data show that manufacturing firms are more likely to take action and take multiple actions than service sector firms. Price increases were the most common change, though many firms also reported altering capital expenditures, shifting hiring plans, and moving up purchases. Meanwhile, a minority of firms sourced new suppliers. There is still much uncertainty impacting business decision-making. As one North Carolina manufacturer put it: "The economic uncertainty regarding tariffs and international trade has greatly constrained our ability to make decisions." Given lingering uncertainty, it will be important to continue monitoring how our region's firms negotiate the economic and policy environment.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.