Afford Anything Podcast: First Friday - How April’s Tariffs Changed the Economy (May 2, 2025)

Host: Paula Pant | Network: Cumulus Podcast Network

Introduction and Overview

In this episode of Afford Anything, Paula Pant delves into the profound economic shifts triggered by the steep tariffs implemented in April 2025—the highest in over a century. While the show often centers on finance and investing, this episode extends into the broader realms of economic psychology and decision-making frameworks, reflecting the show's commitment to metacognition and critical thinking.

Notable Quote:

Paula Pant [00:00]: "We're living through an economic experiment that hasn't been seen in over a century."

April’s Tariffs: Historical Context and Immediate Impact

Paula begins by comparing the recent tariff escalation to historical precedents, notably the Tariff Act of 1890 (often associated with McKinley) rather than the Smoot-Hawley Tariff Act of 1930. She emphasizes that while both aimed to protect domestic industries, the contexts and outcomes differed significantly.

Key Points:

• Scale of Tariffs: April 2025 saw tariffs rise to levels unseen since 1890, not targeting specific industries but entire countries, primarily China.
• Historical Comparison: Unlike Smoot-Hawley, which exacerbated the Great Depression by targeting specific industries, the McKinley-era tariffs implemented broad import duties (~25%) with some sectors facing up to 50%.
• Modern Differences: Today's globalized economy and the U.S. Dollar's status as the world reserve currency complicate direct historical comparisons.

Notable Quote:

Paula Pant [10:15]: "The more accurate comparison was the Tariff Act of 1890... It raised rates to a comparable amount."

Strong Jobs Report Amid Tariff Shock

Despite the turmoil caused by the tariffs, the U.S. economy showcased remarkable resilience. The Bureau of Labor Statistics reported a significant addition of 177,000 new jobs in April, surpassing forecasts and maintaining the unemployment rate within a narrow band of 4% to 4.2% since May 2024.

Key Points:

• Job Growth: Healthcare led with 51,000 new jobs, followed by construction, transportation, and financial activities.
• Federal Employment Decline: A reduction of 9,000 federal jobs in April, totaling 26,000 in 2025, though this may be overstated due to paid leave and severance considerations.
• Economic Resilience: Despite higher tariffs, the service sector—comprising 70% of U.S. commercial activity—remains largely unaffected directly by tariffs.

Notable Quote:

Paula Pant [05:25]: "The jobs report is strong. It shows a lot of resilience within our economy."

Expert Insight:

Olu Sonola [07:53]: "The R word that the labor market is demonstrating in this report is resilience, not recession."

Market Reactions: Stocks, Bonds, and the Dollar

The implementation of high tariffs precipitated significant volatility across financial markets. While the stock market exhibited turbulence, bond yields experienced one of the sharpest spikes ever recorded, and the U.S. Dollar weakened to its lowest in decades.

Key Points:

• Stock Market: Volatile reaction to job growth data, with unusual inflows into the Vanguard S&P 500 ETF despite market instability.
• Bond Market: Initial spike in 10-year Treasury yields near 4.6%, signaling diminished investor confidence, followed by a stabilization.
• U.S. Dollar: Experienced its most substantial decline since the 1960s, impacting exporters and the dollar's status as the reserve currency.

Notable Quotes:

Paula Pant [12:45]: "The rate on a 10-year Treasury note posted one of the sharpest spikes that we have ever seen."

Paula Pant [17:30]: "The stock market in the short term represents fear and greed."

Consumer and Small Business Sentiment

Economic indicators reveal a dichotomy between robust employment data and deteriorating consumer and small business confidence. While job numbers are impressive, the prevailing sentiment is pessimistic, with concerns over inflation and future unemployment.

Key Points:

• Consumer Sentiment: Nearly 70% expect higher unemployment, and inflation expectations have surged to their highest since the early 1980s.
• Small Business Outlook: Optimism among small business owners has sharply declined, particularly as tariffs increase operational costs without commensurate benefits.

Notable Quotes:

Paula Pant [22:10]: "Consumers are nervous about the short-term future... their expectations that prices will rise nearly 7%."

Paula Pant [23:50]: "Small business owners are far more pessimistic right now than they were a few months ago."

Inflation Expectations Surge

Inflation fears are at an apex, with consumers and businesses bracing for higher prices. This surge in inflation expectations significantly impacts spending behaviors and economic stability.

Key Points:

• Short-Term Anxiety: University of Michigan data indicates consumers expect a ~7% rise in prices over the next year.
• Long-Term Outlook: Expectations stabilize slightly to just above 4% over five to ten years, still marking the highest since 1991.
• Spending Behavior: Anticipation of higher future prices has led to increased consumer spending in April, as individuals rush to purchase necessary goods before price hikes.

Notable Quote:

Paula Pant [25:00]: "If you expect that prices are going to be higher in the future, you stock up now."

Listener Question: Portfolio Decline and Financial Independence

A listener named Joanna poses a critical question regarding her financial independence (FI) status after experiencing a 30% decline in her investment portfolio due to the recent market volatility.

Question:

Joanna [31:23]: "I was financial independent until two weeks ago before Trump's tariffs. I now lost about 30% of my portfolio. Can I still consider myself financially independent even if my current numbers do not say so?"

Expert Insights on Navigating Market Volatility

Paula is joined by Josal Sehai, a former financial advisor, to address Joanna's concerns. Together, they explore the principles of maintaining financial independence amidst significant portfolio fluctuations.

Key Points:

• Portfolio Resilience: An FI portfolio is designed to withstand market shocks. Short-term declines are normal, and long-term perspectives are crucial.
• Long-Term Investing: Emphasizing the importance of a diversified and balanced portfolio to navigate periods of high volatility.
• Emotional Resilience: Avoiding panic during market downturns and adhering to a disciplined investment strategy.
• Regular Assessments: Conducting periodic reviews (e.g., quarterly) rather than reacting to every market movement to maintain a clear investment path.

Notable Quotes:

Josal Sehai [34:02]: "Portfolios are built to withstand these types of shocks and risks because it is normal for the market to decline and it is normal for the market to be volatile from time to time." [34:02]

Paula Pant [37:53]: "It seems to me as though when you're evaluating for a long-term goal, doing a point in time analysis at random intervals... seems to me to be scattered." [37:53]

Strategies Discussed:

• Milestone-Based Planning: Setting and adhering to financial milestones regardless of short-term market conditions.
• Diversification: Incorporating assets like commodities (e.g., 2% in gold) to reduce portfolio volatility.
• Adaptable Financial Plans: Adjusting financial plans based on portfolio performance relative to milestones, without making impulsive changes based on market noise.

Notable Quote:

Paula Pant [45:12]: "We've talked about the efficient frontier many times on previous episodes. Go to Portfolio Visualizer and play with the efficient frontier." [45:12]

Conclusion and Takeaways

Paula and Josal wrap up the episode by reinforcing the importance of maintaining control over one's financial plan, staying within the locus of control, and avoiding reactive decision-making based on transient market conditions.

Key Takeaways:

• Stay the Course: Adhering to a well-structured, diversified financial plan is paramount during economic volatility.
• Empowerment Through Knowledge: Understanding economic indicators and their implications helps in making informed financial decisions.
• Continuous Learning: Engaging with financial education resources, such as Paula's newsletter, can provide deeper insights beyond the podcast.

Final Notable Quote:

Paula Pant [58:38]: "You can't coast on being financial independent." [58:38]

Final Thoughts

This episode of Afford Anything offers a comprehensive analysis of the economic upheaval caused by unprecedented tariffs, juxtaposed with robust employment data and volatile financial markets. Through expert dialogue and actionable advice, Paula Pant equips listeners with the knowledge to navigate financial independence amidst uncertainty, emphasizing resilience, strategic planning, and disciplined investing.

Helpful Links:

• Escape – Paula's free book: http://affordanything.com/escape
• Portfolio Visualizer: https://www.portfoliovisualizer.com