The choice to absorb the costs related to tariffs could also indirectly act as a brake on staffing demand.
Max Aldrich
Weekly Economic Outlook
06/18/2025
Can Businesses Absorb the Cost of Tariffs?
As tariffs increase costs for many businesses, higher prices are a likely consequence for consumers. However, recently released data from the Bureau of Labor Statistics show that movement in inflation has been relatively muted since major adjustments to trade policy were announced earlier this year. Core inflation increased only 0.1% in May and even edged down 0.2% in April. While many businesses have suggested they will have to raise prices in order compensate for the higher costs induced by tariffs, is it possible that they could simply eat the cost and as a result keep price stability?
A May survey from the Federal Reserve Bank of New York found that only around 25% of responding firms fully absorbed the increased costs from tariffs. The remaining 75% passed at least some of the cost onto consumers, with around 33% of manufacturers and 45% of service firms reporting passing the entirety of the cost incurred. The survey was conducted May 2–9 when tariffs on China were still in the triple digits, potentially skewing the levels at which businesses needed to pass along costs.
With a more moderate tariff regime, there may be good reason to believe that private businesses have the capacity to absorb these costs. Corporate profits as a percent of national income grew substantially both during and after the pandemic, currently composing a historically high proportion of 17.2% as of 1Q2025. This suggests that firms potentially have the wiggle room to offset the direct and indirect costs from tariffs by accepting lower profits. If businesses choose to absorb these costs in this way, it could mitigate the inflationary pressure that economists and the Federal Reserve expect elevated tariff rates to create. Additionally, absorbing some costs to sustain present levels of demand is in the interest of companies themselves.
However, early economic indicators suggest that corporate profits are already under some strain, noting a 2.9% decrease quarter-to-quarter in 1Q2025. Even if businesses do decide to eat much of the tariff burden potential economic consequences do not disappear. Contracting profit margins limits the resources available for companies to invest in expansion and hiring, dampening economic activity and labor demand. The choice to absorb the costs could also be one that would indirectly act as a brake on staffing demand, slowing the industry’s recovery and short-term prospects.
Before Tax Corporate Profits as Percent of National Income
Source: Bureau of Economic Analysis
Weekly Staffing Research Outlook
06/18/2025
While businesses have many ways in which they can mitigate the impact of tariffs, the chilling effect on headcounts means that the trade war remains a challenging headwind for staffing firms.
Tim Hulley
Businesses Take Multipronged Approach to Managing Tariffs
“Liberation Day” was more than two months ago, and while many of the dramatic tariff increases have been paused or reduced, as of June 1 the Yale Budget Lab estimates the effective tariff rate to be 15.6%—the highest since 1937. So how are businesses dealing with these price increases, and what do they mean for staffing demand?
As noted in the first part of this Weekly Economic & Business Outlook report, inflation readings have been modest over the last several months, and businesses may have some capacity to absorb increasing input costs. In truth, however, businesses are using a variety of approaches to manage increasing import costs.
Despite the tame inflation data, one tool has been price increases. According Liberty Street Economics, a net 44% of service firms and 46% of manufacturers report having increased the prices of goods directly subject to tariffs. In addition, a net 18% of service firms and 26% of manufacturers have increased prices on goods unaffected by tariffs. In addition, firms have increased the amount of goods purchased from within the U.S. and have increased their inventory levels.
On the other hand, a net 38% of service firms and 33% of manufacturers have seen reductions in their net income, with a potential flow-down effect of a net 10% of service firms and 6% of manufacturers reducing headcount. While businesses have many ways in which they can mitigate the impact of tariffs, the chilling effect on hiring means that tariffs remain a challenging headwind for staffing firms.
Businesses Have Adjusted to Higher Tariffs in Many Ways
Source: Federal Reserve Bank of New York
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