Tariffs, fuel prices and interest rates weigh on U.S. companies

The number of flights will decrease and ticket prices will increase. Freight surcharge. Manufacturers are stockpiling inventory. Even bankruptcy.

For U.S. companies large and small, the combination of tariffs imposed under President Donald Trump’s trade policies, soaring fuel prices due to the Iran war, and now rising interest rates are forcing executives to make tough choices.

Allen Eden, whose 25-employee business in Bullitt, Iowa, Original Saw Company, which makes industrial power saws for wood and metalworking, is dealing with rising prices for aluminum, steel and essential parts while continuing to carry excess inventory.

As an example, he said the price of the “little brackets” used in his saw motors more than doubled this summer, jumping from $42 to $87.

“It’s terrible,” Eden, 56, told CNBC. “(I’m) just trying to keep more stuff in my hands, because I don’t know if I’ll be able to do that in the future.”

This is a triple whammy for manufacturing, transportation, and retail companies. Tariffs are increasing the prices of raw materials and products. Rising fuel prices are increasing the cost of producing and moving them. Rising interest rates are also making it more expensive to finance the inventory and equipment needed to operate a business.

Few sectors are completely shielded from these pressures, but middle-market manufacturers are particularly hard hit. Rising steel and fuel prices have forced at least some of these expenses to be passed on to higher prices, contributing to the stubborn inflation of the past few years.

However, the Federal Reserve raised interest rates for the first time in three years in an effort to curb inflation and signaled that further rate hikes may occur later this year. That makes it more expensive for companies to borrow for inventory and growth, while higher input costs and record prices for diesel, which is used for trucking, squeeze profits.

The price of Eden’s saws increased and both were sold to huge retailers such as: home depot And for small and medium-sized manufacturers, this is inevitable, business owners said.

The pain is not evenly distributed. Small businesses typically rely on short-term loans, which means Fed rate hikes are more directly reflected in their costs. JP Morgan Chase Dubravko Lakos-Bujas, head of global strategy, said in a September 14 memo:

But capital-intensive sectors of all sizes, such as manufacturers, equipment suppliers, logistics companies including trucking, and commercial real estate, will also be hit even harder in a rising interest rate environment, Lakos-Bujas said.

“The combination of rising interest rates and rising fuel prices means that sectors with significant exposure to both will be the first to be attacked,” said Gregory Daco, chief economist at EY Parthenon, the global consulting division of Ernst & Young.

“Manufacturing industries of all types will be disproportionately exposed to higher fuel prices,” he said.

Rising fuel and commodity prices are putting a strain on both material manufacturers and the retailers they serve.

Mark Costa, CEO of an industrial giant eastman chemicalsaid in May that the one-two punch of interest rates and inflation was pushing the industry into a corner. Eastman makes plastics, additives, and other materials used in a variety of products, including medical devices, animal feed, and car windshields.

“Everyone’s back was against the wall and there was no room to absorb these increases,” Costa said. “Everyone is raising prices very quickly, faster than I’ve seen in 20 years.”

Home Depot Chief Financial Officer Richard McPhail said last month that the benefit of $730 million in tariff rebates was “fully offset” by unexpected pressures from energy and raw material costs.

“There’s a lot of uncertainty at the moment. … You’re thinking about inflation, you’re thinking about interest rates, you’re thinking about fuel prices,” MacPhail said in a briefing last week.

Manufacturers in the domestic automobile supply chain were hit the hardest.

Lucerne International, a privately held auto parts maker based outside Detroit, has shut down its U.S. manufacturing operations and canceled plans to build a $50 million aluminum forging factory in Michigan last year.

“The onset of Trump Tariff 2.0 has created a truly gaping hole in the global supply chain and significantly increased costs,” said Lucerne CEO Mary Buchzeiger, citing increased costs not only for finished parts but also for raw materials, including aluminum.

Buchzeiger, which still manufactures overseas, has shifted its U.S. operations to warehousing, distribution and duty relief solutions for other companies, which he said are “much more profitable.”

“There’s no doubt there’s margin pressure on suppliers,” said Paul McCarthy, chief executive of MEMA, the auto supplier trade group. “Some of it we try to absorb, but some of it we have to pass on.”

Growth, as measured by profit before interest and taxes, for the top 100 auto suppliers last year was 4.2%, down from just over 6% in 2021, according to consulting firm Beryls by AlixPartners. Among the top 10 automakers, the figure was 5.2%, down from nearly 8% in 2022.

Not all car companies are able to manage the additional costs. Grupo Antolin, a Spanish auto parts manufacturer, supplies parts to the following automakers: ford, GMVolkswagen, Stellantisfiled for Chapter 15 bankruptcy in the United States in July. The company cited tariffs, rising raw material and energy costs, and supply chain disruptions as reasons for the restructuring.

Wealthier are the big companies, like the technology and financial companies that fill the corporate world. S&P500. These companies typically hold more cash and take out long-term debt, which provides them with some protection from the effects of rising interest rates.

Most large companies are able to grow until borrowing costs rise further. JPMorgan’s Lakos Bujas, citing 80 years of data, said the pain would hit if the 10-year Treasury yield reached 6%, up from about 5% now.

Borrowing costs are expected to remain high for an extended period of time. As inflation persists, Mr. Warsh was forced to raise the Federal Reserve’s standard interest rate against Mr. Trump’s wishes, and combined with the large amount of borrowing from the U.S. government, there is continued upward pressure on interest rates.

Across America, companies are tackling these shocks in a variety of ways. This disagreement boils down to one question: Who has the power to set prices?

While some industries have learned that higher costs can be easily passed on to consumers, others are caught in a catch-22 where raising prices too much risks destroying demand.

Airline executives last week boasted that fares would rise and they would be able to pass on higher fuel costs to travelers as customers continued to book trips, especially overseas. Airlines scaled back growth plans and cut unprofitable flights even after Spirit Airlines went bankrupt this year.

Fewer flights could mean higher ticket prices, with fares rising more than 23% in August compared to last year, according to the latest inflation figures. However, even strong demand has its limits.

“Consumers have been incredibly resilient,” United Airlines Chief Financial Officer Mike Leskinen said Wednesday at a Morgan Stanley conference in Laguna Beach, California.

“But there are some marginal routes that don’t make sense in an environment of high fuel prices, so we cut them down,” Leskinen said. “You’ll see us acting like that…in the future.”

Most American businesses remain resilient despite rising fuel and financing costs. Profit margins for major companies are hovering near historic highs due to vast increases in productivity, suppressed labor costs, and a surge in investment in artificial intelligence to drive growth.

But the risk with Mr. Warsh’s initiative is that raising interest rates does not directly address the root causes of inflation: the Iran war, the Trump administration’s tariffs, and the AI ​​boom that has driven up the price of everything needed to build and operate data centers, from electricity to memory chips to copper to land.

EY Parthenon’s Daco said raising interest rates to put the brakes on the U.S. economy could slow the economy too much and cause stock prices to slump.

“The economy is resilient but exposed to increasing risks,” he said. “The shock could materialize sooner than we think.”