By Jen Saarbach & Kristen Kelly, Co-Founders of The Wall Street Skinny
Markets have been on a rollercoaster following the tariff announcements (Jen has aged in dog years). Yet major equity indices have rebounded to levels from before tariffs were first introduced. That might seem reassuring…but it shouldn’t be.
The truth is, the real economic impact of the tariffs hasn’t hit yet. And the reason is simple: inventory.
When companies, whether it’s Big Tech or a small business, want to make a sale, they typically want product on hand. That means stocking up on raw materials or placing manufacturing orders, often months in advance. Many firms anticipated tariffs and front-loaded inventory.
But that buffer? It’s only temporary.
You can actually see how long this buffer is via a metric called Inventory Days, which shows how many days’ worth of inventory a company is holding.
The formula is: Inventory Days = (Inventory / COGS) × Days in Period
Take Nike, a company that manufactures in Vietnam. Vietnam was hit with the global 10% tariffs plus some additional reciprocal amount (exact % is TBD as Trump threw a 90 day pause to negotiate with countries).
At the end of Q1, Nike had $7.5 billion in inventory and $6.6 billion in cost of goods sold. The inventory days formula then becomes:
Inventory Days = ($7.5bn / $6.6bn) x 90 (days in Q1) = 102
102 days of inventory is about 3.5 months of product. As they plan for that to run out, they need to reorder.
And that’s when the real economic hit begins.
We’re actually starting to see troubling signs in the shipping industry, as shipments from China are expected to drop 35% next week. And the problem is lead time. After all, it takes a while for boats to make it here. Many companies actually need to be planning for back to school and even the holiday season now.
To see why shipping is down, let’s consider Munchkin, a baby products company, that manufactures in China. Their tariff rate is currently set at 145%. So if they order $100,000 worth of goods, they now owe $100k to the factory plus $145k in U.S. tariffs, for a total cost of $245,000. And it’s the U.S. importer paying that, not the Chinese manufacturer. This is what has led to many companies deciding to just stop shipments all together, hoping for these tariffs imposed unilaterally by the US to be dropped.
Sure, companies can try to renegotiate pricing, but Chinese factories can’t cut their costs by 145%.
That leaves U.S. businesses with few options: raise prices, eat the cost (unsustainable), or cut orders entirely, potentially leading to layoffs and company closures. Shifting supply chains takes time and money, something many companies just don’t have. Policy uncertainty only makes it harder to plan.
Bottom line: Just because the market has bounced back doesn’t mean we’re in the clear. As inventory levels fall and companies are forced to re-engage with the tariff-hit supply chain, expect to see the real pain emerge: higher prices, product shortages, and growing strain on both businesses and consumers.