Tariff Fog Clears: Substitution Demand Outpaces Data Gaps

The fog isn't just metaphorical-it's a full-blown economic blackout. Since October 1st, the government shutdown has halted critical statistical agencies, creating the longest official data vacuum in U.S. history. Agencies like the Bureau of Labor Statistics couldn't collect new data after October 1st, leaving key metrics on hiring, spending, and inflation dark. Even the September inflation report used for Social Security adjustments was based on pre-shutdown collections, and officials warn the October release may never come. This blackout forces policymakers into a defensive crouch. Fed Chair Jerome Powell explicitly framed the paralysis as driving in thick fog, justifying the central bank's cautious rate decision-making. The Fed now awaits clearer signals before moving, likely delaying any December cut if the shutdown persists past November 12th-pushing the base case rate cut to January 2025 instead. Economists like Karen Dynan stress the permanent informational gap this creates, noting we'll forever wonder what truly happened in those weeks. Private data sources offer conflicting snapshots-Johnson Redbook shows healthy retail growth while Bloomberg debit card trends suggest a slowdown-but they lack the official weight and scope of government statistics. This tactical uncertainty, not structural collapse, is the primary market headwind, muddying forecasts and compounding the effects of persistently high tariffs.

Tariffs are forcing businesses to rethink compensation structures as labor market pressures intensify. Nearly 60% of companies surveyed by WTW before April 2025 anticipated tariffs would directly hurt profitability, prompting aggressive cost management strategies. Among those most exposed, 42% are trimming salary budgets while 50% are overhauling executive incentive plans-more than double the rates seen across all firms. These adjustments reflect a broader shift: workers increasingly prioritize pay growth over stability, with nearly half of survey respondents citing base pay concerns as their top anxiety. Yet some flexibility may offset these cuts. Employees showed surprising openness to trade-offs, with 58% in WTW's 2024 survey willing to accept an 8% pay reduction for remote work benefits. This willingness to exchange wages for flexibility creates tactical opportunities for firms navigating tariff-driven headwinds. However, the prolonged government shutdown since October has complicated planning further, leaving firms to navigate "data fog" as the Federal Reserve notes uncertainty could delay policy clarity on wage trends. Despite these challenges, companies are prioritizing critical talent retention through targeted incentive redesigns rather than blanket freezes-a move CEOs view as essential to maintaining operational agility amid economic turbulence.

Despite mounting tariff pressures, core consumer demand continues to provide a surprisingly sturdy foundation for pricing power across key sectors. July's personal consumption data reveals a notable dichotomy: while discretionary services like food and hotels showed clear weakness, spending on physical goods remained resilient. Economists attribute this goods spending inertia partly to households "stocking up on goods in anticipation of future tariff-driven price hikes" (https://fortune.com/2025/08/29/july-pce-data-inflation-consumer-spending-income-hidden-cracks-trump-tariffs/), effectively front-loading purchases to avoid expected cost increases. This behavior, combined with a surprising rebound in wage growth to 0.6%, has created a temporary cushion against outright consumer retrenchment. However, the situation isn't uniform; the data blackout following the October government shutdown has complicated the picture, forcing reliance on "conflicting private-sector signals" on the job market, ranging from healthy retail sales to spending slowdowns. Businesses, acutely aware of the pinch, are actively adjusting. The WTW pulse survey found 59% of companies expected direct tariff impacts to compromise profitability, prompting concrete operational shifts. Crucially, 76% of CEOs reported tariffs would negatively or very negatively impact their businesses in 2025. This pressure is manifesting in compensation strategies, with 42% of highly impacted companies considering downward adjustments to salary increase budgets. The focus is sharpening on core employees and transparent communication, recognizing that workforce stability is paramount for navigating this uncertain landscape. While the tariff environment remains a significant headwind and embedded inflation risks persist, the current resilience in goods demand demonstrates the potential for sustained pricing power where core needs are met. Companies leveraging data-driven targeting to identify and protect these essential demand streams-and optimizing internal structures to mitigate cost pressures-appear best positioned to maintain margins and market share despite the turbulence. The Federal Reserve's recent rate cut, influenced by the very uncertainties highlighted by the data blackout, further underscores the challenging macro backdrop but hasn't yet disrupted the underlying consumer patterns driving this resilience.

The Fed's cautious stance in October, marked by a 0.25 percentage point cut alongside internal dissent, set the stage for what policymakers now call a state of 'data fog'-a term capturing the unprecedented uncertainty sown by the government shutdown. Official data collection remains suspended, forcing reliance on patchy private-sector signals that tell conflicting stories: Johnson Redbook Indexes suggest resilient retail spending this fall, while Bloomberg's debit card data hints at a slowdown. This ambiguity has pushed the central bank's next major move to the December 9-10 meeting, where the base case remains a rate cut targeting 3.5%-3.75%, pending clearer labor market and inflation data. Economists warn that without resolved data flows, the probability of a December decision diminishes significantly, making January the more likely window.

For growth-focused investors, this delay creates a critical inflection point. The lingering uncertainty amplifies the appeal of sectors less sensitive to near-term monetary policy shifts, particularly those benefiting from structural trends insulated from the fog. Data center operators, for instance, face robust demand from hyperscalers building AI infrastructure, with energy consumption at U.S. facilities already surging according to Pew Research. If the shutdown extends past mid-November, delaying the December Fed meeting, the resulting policy clarity-or lack thereof-will test market resilience. A January rate cut would bolster high-growth tech and infrastructure stocks, while continued delay could favor companies with strong cash flows and proven substitution demand, like those supplying domestic alternatives to sanctioned technologies. The Fed's next move, therefore, isn't just about rates; it's a litmus test for how markets price in delayed macro clarity versus entrenched growth narratives.