There's growing evidence that U.S. manufacturers are absorbing tariff costs to protect demand, handing a big win for the Trump administration and its trade strategy.
While investors focused on the Bureau of Labor Statistics’ latest headline Producer Price Index (PPI) for August, the more telling figure was the margins index, which tracks the gap between what producers earn on goods and what it costs to make them.
The margins index fell 1.7% in August, its steepest drop in over a year and the second-largest monthly decline in at least six years.
“U.S. producers’ margins are falling,” wrote The Kobeissi Letter, a markets newsletter. “Producers’ profits have declined as input costs, including tariffs, have risen faster than selling prices.”
US producers' margins are falling:
undefined The Kobeissi Letter (@KobeissiLetter) September 12, 2025
The PPI margins index fell -1.7% MoM in August, to the lowest since April, and marking the largest decline since July 2024.
This is also the second-largest monthly drop in at least 6 years.
PPI margins measure the difference between what… pic.twitter.com/nDs4K64WoO
The data suggests companies are still shouldering higher costs rather than passing them on to consumers, a move that helps support demand but leaves corporate profits under pressure.
How long that can continue is uncertain, especially for manufacturers already operating with slim margins.
“There’s going to be a cash squeeze for a lot of these firms,” said Chris Bangert-Drowns of the Washington Center for Equitable Growth, whose recent research found tariffs could raise manufacturing costs by as much as 4.5%.
For now, U.S. producers appear to be walking a tightrope, balancing cost pressures with political and economic expectations as the administration seeks to reshape the structure of the economy.
Tariff revenues surge, but questions remain
Adding to perceptions that the Trump administration’s trade war is achieving its goals, tariff revenues climbed to $29.5 billion in August, bringing the year-to-date total to $165 billion.
“This has occurred even as the pass-through to consumer prices has remained lower than many expected,” wrote Mohamed El-Erian, President of Queens’ College, Cambridge, and chief economic adviser at Allianz.
Still, El-Erian cautioned that several uncertainties linger: whether tariff pass-through to consumers is delayed or fully absorbed by producers; the potential scale of reshoring activity in the U.S.; and the degree of economic distortions that could emerge in a post-tariff environment.
Another challenge is fiscal. Despite record tariff receipts, the revenue has made little impact on the federal budget deficit.
In July, spending climbed to a record $630 billion, producing a $291 billion shortfall, with tariff revenue covering only about 10% of the gap. At the current pace of federal spending, the U.S. budget is unlikely to balance during the Trump administration or in the foreseeable future.
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