## Businesses Navigating the Impact of Increased Tariffs in the NY-Northern NJ Region

Recent findings highlight that U.S. businesses are grappling with elevated import tariffs, which have prompted significant operational and pricing adjustments. A survey conducted in early May by the Federal Reserve Bank of New York examined the effects of these tariffs on firms in the New York-Northern New Jersey area.

The survey revealed that approximately 90% of manufacturers and 75% of service firms import goods, and these firms have faced steep increases in tariffs. Over the past six months, manufacturers reported an average tariff rate of 35% on imported goods, a 25-percentage point rise, while service firms noted a 26% tariff rate, up by 17 percentage points. As a consequence, manufacturers experienced a 20% spike in the cost of goods subject to tariffs, and service firms saw a 15% increase.

Most businesses in the region did not shoulder these costs alone. The survey found that about three-quarters of manufacturing and service firms passed on some or all of these costs to their customers through higher prices. Specifically, almost a third of manufacturers and about 45% of service firms entirely passed on tariff-related cost increases, while 45% of manufacturers and a third of service firms passed on some, but not all, of the increased costs. On the contrary, about a quarter of firms in both sectors absorbed the tariff costs without raising prices.

The response to tariff-induced cost increases was swift, with over half of the firms adjusting their prices within a month. This adjustment was even more rapid for some, occurring within a day or a week. About a quarter of businesses reported or planned to increase prices within one to three months, with few delaying beyond three months.

Businesses have also shifted their sourcing strategies and inventory management in response to the tariffs. Many firms increased their procurement of domestically sourced goods while reducing imports. Approximately a third of firms boosted their inventory levels to mitigate potential supply disruptions and cope with rising tariffs, although about 15% of firms reduced inventories to meet immediate demand.

The tariff hikes have also subtly influenced employment and capital investments. Generally, headcount adjustments were minimal, but showed a slight tendency towards reductions. Capital investments in the manufacturing sector remained relatively unchanged, with a small net increase in investment activity, whereas the service sector experienced a noticeable decline in investment.

Despite these adaptations, nearly half of the businesses reported a drop in their bottom lines, reflecting the significant challenge posed by the tariffs. However, some businesses benefited, particularly those producing domestic goods that compete with higher-priced imports.

Looking forward, firms are highly uncertain about the tariff landscape. While around half of the service firms and a third of manufacturers anticipate further tariff increases over the next six months, a notable portion expects tariffs to decrease. This uncertainty is complicating decision-making and strategy formulation for businesses across the region.