①Morgan Stanley's chief U.S. economist, Michael Gapen, stated that the premise for the U.S. economy to avoid large-scale layoffs in 2026 is that enterprises continue to raise prices on the basis of price hikes implemented in 2025; ②A Morgan Stanley survey shows that U.S. companies plan to further increase prices in 2026 to address tariffs, and if successful, inflation will intensify but layoffs can be avoided.
Cailian Press reported on December 25 (edited by Huang Junzhe) that Michael Gapen, Chief U.S. Economist at Morgan Stanley, recently stated that the U.S. economy might be able to avoid large-scale layoffs in 2026, provided that companies continue to raise prices on the basis of increases implemented in 2025.
In his latest report, he noted that the latest GDP data show that enterprises have “taken an important step towards recovering tariff costs by pushing up output prices,” which helps restore profitability and mitigate recession risks. According to a survey by the investment bank, U.S. companies are planning to further increase prices in 2026 to address tariffs.
This analyst further pointed out that “tariffs have significantly driven up non-labor costs over the past two quarters.” Enterprises initially responded by reducing hiring and seeing their profits impacted. However, in the third quarter, companies began passing on more costs: “The rise in unit prices exceeded non-labor costs, helping to restore profitability.”
The latest survey data from Morgan Stanley shows that enterprises “plan to further raise prices in 2026.” If this strategy succeeds, the bank believes that inflation will worsen, but “layoffs should be avoidable.” Morgan Stanley also reiterated its core view that tariffs can be absorbed by exporters, U.S. businesses, or consumers.
“As supply chain adjustments are largely complete, it is unlikely that exporters will absorb more costs, and we expect companies to continue passing on a significant portion of tariff costs.” The report said.
However, assuming the government does not push forward with tariff policies, Gapen noted that most of the impact of tariffs being passed on to final consumer prices should already be completed. He wrote, “Overall, our expectation is that inflation will stabilize, profitability will be largely restored, and the economy will avoid layoffs.”
He added that his team expects that as the mid-term elections approach in 2026, the Trump administration will not impose new tariffs. However, analysts also emphasized that they believe companies have not stopped raising prices.
The bank maintains its core view that existing tariffs will push core inflation to reach 3% in early 2026, with signs of this already appearing in consumer goods prices. The report stated, “There was a noticeable increase in monthly consumer price inflation from June to September, with components of the CPI and PCE that are heavily affected by tariffs showing an increase.”
At the same time, it is important to note that consumers’ ability to tolerate rising prices is limited, especially given persistently high economic uncertainty. It remains unclear at what point rising prices will deter consumers.
Morgan Stanley added: "If companies find that they are unable to raise product prices due to consumer resistance and loss of market share, we believe they will turn to further reducing labor costs, which could lead to layoffs."
Editor/Rocky