Consumption, Buffering Impact of Trump Tariffs

The U.S. reciprocal tariffs were announced on April 2, with exceptions for steel, aluminum, automotive and certain parts, copper, pharmaceuticals, semiconductors, gold bullion, energy, as well as certain minerals strategic to the U.S. manufacturing supply chain. In response, the financial institution Moody's increased the probability of a U.S. recession from 15 to 40 percent.

Indonesia faces a 32 percent tariff. The impact of this tariff will be evident in labor-intensive industries oriented toward exports, which will eventually affect economic growth.

The opportunity to mitigate the impact of tariffs lies in seeking new markets, focusing on the potential for exporting products not subject to tariffs, and boosting domestic consumption. Countries with large populations, such as Indonesia, have the flexibility to leverage their domestic markets.

In this case, domestic consumption serves as a buffer while negotiating to seek compromises and alternative markets. The announcement of the tariffs coincided with the homecoming season in Indonesia. What differentiates it from the past is that now homecoming is carried out to various destinations. With the development of non-primary cities, homecoming occurs not only from major primary agglomeration cities to non-primary cities but also vice versa and between non-primary cities.

Homecoming serves as an initial buffer for consumption growth stemming from the effects of tariff contraction. Subsequently, until the end of the year, its dynamic intertemporal multiplier effect can be continued by encouraging subsequent intercity mobility. However, homecoming behavior and other mobility patterns have changed, necessitating incentives. The global situation has shifted due to the pandemic or geopolitical factors. Prices of goods and services are higher and cannot approach pre-pandemic levels, even though inflation has significantly decreased.

As a result, households emphasize minimizing expenditures (Gimenez-Nadal, 2018). If there are budget constraints, saving and postponing expenses become ways to accumulate funds (Duffy, 2019). Expenditures for homecoming trips compete with other needs in household budgets, leading to changes in consumption patterns.

Here, observation of the average propensity to consume (APC) published by BI becomes important. An increase in APC implies a decrease in APS (average propensity to save), indicating more income is spent.

On the other hand, the increasing APS indicates saving activity for future consumption. Before the pandemic, in 2018-2019, the month when Lebaran fell was still marked by a higher APC (single peak) compared to the month before and after. After the pandemic subsided, in 2021 and 2022, the pattern showed a change.

In 2021, the APC of 75.8 was still higher during the month of Lebaran, which fell on May 12, compared to the months before and after, which were 75.6 and 75.5, respectively. Lebaran occurred around the middle of the year, giving consumers sufficient time—six months—to save in preparation for the Christmas and New Year holidays.

In 2022, the pattern is the same, with APC 74.3 in the month of Eid which falls on May 1. This figure is higher than the previous month, 73.8, and the following month, 74.2. The difference is narrower than in 2021 because Eid is moving closer to the beginning of the current year.

Homecoming remains the main preference, but the timing is more flexible, and can even be shifted at any time to take advantage of the long holiday, while waiting for sufficient funds. This can be seen from the highest APC of the current year of 75.6 achieved in December 2022.

The picture changed in 2023 when Eid fell on April 21, which is no longer an early date. March's APC was 75.7, higher than April's 75.2, indicating that spending was done earlier. The following month, May, APC rose again to correct the underspent during Eid, one of which was by going home after Eid. 2024 was different again because Eid fell on April 9-10, which was further from the middle of the current year. The APC the previous month was recorded at 73.6, the same as the Eid month. APC then dropped significantly in May to 73.

It gives the impression that people tend to overspent in the month before Lebaran if it falls close to the beginning of the month. It seems that homecoming can also be spread out. It doesn't have to be during Lebaran and can be earlier when it is still the fasting month.

The 2023 and 2024 patterns are sensitive to whether Lebaran falls before or after the middle of the month or on the young versus old date. For 2024, the high APC occurs in March-April with the same APC, which is 73.6 (double peaks), because Lebaran falls on the young date.

Entering 2024, increasing uncertainty due to layoffs in various sectors has caused people to be more cautious. Spending on basic necessities cannot be reduced simply, unless there are cheaper substitutes.

As a result, durable goods have to give way. Durable goods are produced by the manufacturing sector. As a result, the manufacturing sector's PMI (Purchasing Manager Index) in 2024 is in the contraction zone, namely from July to November, because people have to collect funds for the end-of-year holidays.

Eid 2025 falls on the young date, March 31-April 1. The February 2025 APC, which is 74.7, is higher than January's 73.6 and the monthly individual in 2024. It seems that consumers are taking a breather, accumulating funds for future consumption. At the same time, the PMI figure has been in the expansion zone for three months. This is an indication that the durable goods cycle is starting again after a long period of suspended animation. The PMI reached 53.6 in February, the highest in the last 11 months.

March fell again to 52.4, indicating that there has been a rebalancing with the homecoming. Regarding the March APC, there are two possibilities. The homecoming cycle that coincides with the durable goods shopping cycle makes it more complex. If February 2025 consumption is not excessive, the March APC will remain high.

Quarterly growth of year on yearconsumption in 2023 ranges from 4.47 to 5.23 percent. While in 2024 it ranges from 4.47 to 4.98 percent, never reaching 5 percent, one of the reasons being the increasingly wide cycle between the Eid month and the end-of-year holiday in December.

In order for consumption to be a buffer against tariff impacts, in the future it is necessary to fill the gap by strengthening purchasing power. Policies can no longer be limited to cash assistance. Policies must also include efforts to increase household budget space, such as discounts at certain times for electricity, school holidays, and joint leave on pinched days.

Ari Kuncoro, Professor of FEB, University of Indonesia