Morgan Stanley warns: Tariffs have posed a serious threat to the profit margins of American companies and may become a precursor to an economic recession

U.S. import tariffs have become an economic burden, with tariff impacts reaching a "singularity."

According to the Chasing Wind Trading Desk, Morgan Stanley stated in a report on June 30 that U.S. tariff revenue has reached an astonishing scale, with annualized tariff revenue in June reaching $327 billion, equivalent to 1.1% of U.S. GDP.

This astonishing figure poses multiple pressures on the economy and businesses. If companies fully absorb the tariff costs, profit margins will drop from 13.8% to 11.7%, below the 15-year moving average of 12.2%. If all costs are passed on to consumers, it will exacerbate inflationary pressures.

Tax collection is here, and it may stay long-term

Morgan Stanley noted that Treasury Department data shows a sharp upward trend in U.S. net tariff revenue: $15.6 billion in April, $22.2 billion in May, and $27.3 billion as of June 26. The June data annualized reaches $327 billion, accounting for 1.1% of the annualized nominal GDP for the first quarter.

From a tax revenue perspective, the annualized tariff revenue in June is equivalent to: 65% of corporate income tax revenue; 10% of personal withholding tax/social security tax revenue; 32% of personal non-withholding tax revenue.

Analysts warn that while investors are preoccupied with whether consumers or producers will bear more tariffs and when this will show up in corporate earnings or consumer inflation, they overlook a larger, more important fact: U.S. importers have already begun to pay substantial tariffs, and the scale is astonishing.

If companies fully bear the tariff costs, it will significantly impact profit margins. Non-financial corporations had after-tax profits of $2.127 trillion (seasonally adjusted annualized) in the first quarter, and the annualized tariff of $327 billion is equivalent to 15% of their after-tax profits.

In the first quarter, the after-tax profit margin for non-financial corporations was 13.8%, close to the historical high of 15.4% in the second quarter of 2021.

If companies fully absorb the tariff costs, profit margins will drop from 13.8% to 11.7%, 0.5 percentage points below the 15-year average; if companies pass on 75% of the tariff costs to consumers: profit margins can still remain 1.1 percentage points above the average. A pass-through rate of 25-50% will bring profit margins back to pre-pandemic levels.

Economic Growth Momentum Continues to Weaken

Analysts indicate that, aside from tariff impacts, other economic indicators also show signs of slowing growth. Data on air passenger traffic reveals that in May, the year-on-year growth was only 1.7%, significantly lower than the pre-pandemic growth rate of about 6%. In February, prior to "Liberation Day," passenger traffic decreased by 3% year-on-year, reflecting overall weakness in economic activity.

Historical data suggests that declining profit margins are often a leading indicator of economic recession. The current cost pressures from tariffs, whether through reducing corporate profit margins or pushing up consumer prices, are detrimental to economic growth.

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