EPISODE 82: What economic factors should pet food businesses focus on?

The below transcript is from Episode 82 of the Trending: Pet Food podcast, where host Lindsay Beaton and Ernie Tedeschi, director of economics, The Budget Lab at Yale Law School, look at all the different economic factors at play in the today’s pet food space as they answer the question, “Which factors are most important?” You can find the episode at Trending: Pet Food Podcast, on SoundCloud or on your favorite podcast platform. This episode originally aired on March 12, 2025.

We want to thank AFB International for sponsoring this podcast. AFB is the premier supplier of palatants to pet food companies worldwide offering off-the-shelf and custom solutions that make pet food treats and supplements taste great.

Lindsay Beaton, editor, Petfood Industry magazine and host, Trending: Pet Food podcast: Hello, and welcome to Trending: Pet Food, the industry podcast where we cover all the latest hot topics and trends in pet food. I’m your host and editor of Petfood Industry magazine Lindsay Beaton, and I’m here today with Ernie Tedeschi, director of economics at the The Budget Lab at Yale Law School, as well as a visiting fellow at the Psaros Center for Financial Markets and Policy at Georgetown University. Hi Ernie, and welcome!

Ernie Tedeschi, director of economics, The Budget Lab, Yale Law School: Hi, Lindsay. Thanks for having me.

Beaton: In case you’re not familiar with Ernie or his expertise, here’s what you need to know.

Until March 2024, Ernie was the Chief Economist at the White House Council of Economic Advisers, where among other things he briefed President Biden on incoming economic data. Prior to CEA, he was Managing Director and Head of Fiscal Analysis at Evercore ISI, a macro advisory firm. He was also previously an economist at the U.S. Department of the Treasury. Ernie completed his undergraduate studies at Stanford University and graduate work at the University of California at Berkeley.

The Budget Lab at Yale is a non-partisan policy research center dedicated to providing in-depth analysis of federal policy proposals for the American economy.

Ernie Tedeschi is the speaker for the opening keynote at Petfood Forum 2025, being held at the end of April, where he’ll be presenting “Macro-economic outlook and what it means for pet food companies and pet owners.” This, alongside his extensive and on-the-ground experience with the workings of the economy, is why I’ve brought him on today to answer this question: With all the economic factors at play, what are pet food businesses supposed to be focusing on? Ernie, we have a lot to talk about today.

Tedeschi: Yes, we do.

Beaton: I am going to dive right in, but I want to start off with a little bit of history. Historically, what have been the top economic factors that affect consumer packaged goods in general?

Tedeschi: I think it’s helpful to take a step back and briefly think about HOW to think about consumer-packaged goods. We can divide consumer-packaged goods into two different types: discretionary and non-discretionary. Probably makes sense what the two of those are.

Non-discretionary goods are your staples and necessities, things like basic food items. Discretionary items are things like luxury goods. Consumer goods aren’t so easily categorized.

Let’s take food. Obviously, within food, there is non-discretionary and discretionary. Within food, there are different levels of quality within individual categories. Pet food, you might think, is no different than that too.

There is discount-brand pet food, then there is higher-end pet food as well. Consumers can trade up or down depending on how economic circumstances go. Given that context, here are five or six big factors that affect consumer goods.

The number one factor is real wages. What do I mean by real wages? Let me unpack that for a second. The first thing in that phrase is “wages.” Consumption rises with income. The more income we have, the more we consume. I think that makes sense to most people. The most important component of income is wages. Labor income makes up two-thirds of the income that we make when we make more in wages. That’s usually a sign that the economy is doing better. It’s a sign that there’s more employment, that more people have jobs, and that unemployment is low.

So yes, it’s important that income is high, but I really was precise when I said that it’s real wages that I think is the number one factor with consumption. That’s an extra signal the economy is doing particularly well.

To be clear, it’s also good and important when other types of income — business income, investment income, transfer income — when those types of income are high as well that leads to higher consumption.

The second part of that phrase is “real.” What do I mean by real? What could be fake? Real is just another word in economist speak for “inflation adjusted.” As we learned in the pandemic, it’s not just enough that the value on your paycheck goes up over time, it’s that it must beat inflation.

What we want to see is for consumption to go up and for purchases of consumer goods to go up over time, and that income and wages are not only expanding, but that they’re beating inflation.

For several years during the pandemic, that was not the case. Nominal wages — what you see on your paycheck — were reliably going up, but inflation, especially around 2022 was higher than those paychecks. And then things flipped back around 2023, 2024, and real wages started recovering for most Americans in particular.

This was a phenomenon that we saw worldwide as well, where real income and real consumption started recovering from the pandemic. I would say that’s the number one key factor in terms of consumer spending.

The second factor is pricing. This goes right back into inflation, which we just talked about. When prices rise, everything else held constant, everything else held equal, you expect people to spend less but not necessarily the same for all types of items. Again, going back to that framework that I started out with about discretionary versus non-discretionary items.

If I really need something and its price goes up, I might, literally and figuratively eat the price increase. Right? If it’s a food item and I’m dependent on food, I, as a consumer, might absorb more of that price increase for that item, and I might decrease spending in other items as a way of adjusting for that price increase. Whereas for some other non-discretionary items, if there were a price increase for that item, I might decrease my consumption of that particular item when that price goes up. So, pricing is the second most important thing for consumer goods.

Third one is consumer price sensitivity. How sensitive are consumers to prices they see in the economy? This is a key thing right now that I think most people understand. It used to be that consumers didn’t think about inflation very much.

Coming out of the pandemic, consumers are much more aware of prices. They are paying much more attention to the prices that they see on shelves and inflation in the broader economy. They are much more responsive to price increases and decreases in general that they see at retailers, at grocery stores, online than they were before. That influences strategies for different businesses, for how to win and keep customers for different pricing strategies.

The fourth one is consumer expectations. If consumers expect a huge movement in prices in the future, that may affect their behavior. Right now, we’re seeing this play out. Back in December of 2024, consumer surveys, like the University of Michigan survey, showed lots of consumers in the United States expected large price increases for durable goods, for big ticket items like appliances and large electronics because of tariffs this year.

What consumers did because of those expectations is they started buying more of those items last December, ahead of the tariffs. Consumer expectations were a very important part of consumer behavior in terms of their ultimate purchases, the timing of the purchases for those goods.

The last two things — I’ll say consumer tastes, an obvious one. Consumer tastes change over time. Usually consumer tastes change gradually, but I think, as we saw during the pandemic, sometimes tastes can shift dramatically, almost violently, depending on how circumstances change in the broader world. Tastes can also be linked to perceived quality, and that can change over time as well.

The last thing I’ll say is demographics, and I’m ending with this. I don’t mean to imply that demographics is the least important factor here. In some ways, it’s the factor that rules everything else. Who are your consumers? How old are they? How much income do they have? How big is their family? Where do they live?

Demographics have been gradually changing for decades now, and in some ways, when companies think about their pricing strategy, their sales strategy, and what their market is. It must start and end with the demographics of their customer base.

That’s how I think about the big factors affecting consumer goods.

Beaton: I have been covering pet food for about 15 years now, and one of the things that has surprised me, and continues to surprise me about the industry, is that it is the only comparison on the human side that I can make is that it’s similar to the baby segment of consumer goods, in that it is incredibly resistant to price changes and economic fluctuations.

People just really do not want to have to trade down when it comes to their pets. Survey after survey have shown that they would rather cut back on their own human side spending so that they can keep providing their pets with the same thing. It’s like baby formula, right? Once you find that magic baby formula, you will do anything to stay with that, no matter what is going on with pricing, unless you absolutely must switch.

For years now and during the pandemic, everything really went well for these more resistant segments of the consumer goods industry. But everybody has a breaking point, and things are a lot right now. What have you seen historically with categories that are more resistant? What does their breaking point tend to be on the consumer side? What do businesses need to be focusing on right now or be watching so that we don’t miss that breaking point? Or are we in the middle of that breaking point?

Tedeschi: Good question. Why don’t we go right to pet food? Specifically, the good news with pet food, and I think that this speaks to some of the economic anxieties that have arisen this year about the possibility of an economic downturn. I went back and I looked at the responsiveness of different broad categories of consumption consumer goods to economic business cycles in the past. When there is a rise in unemployment, how do different categories of consumer goods — like food, televisions, staplers, that sort of thing — how do they respond to business cycles? How sensitive are they?

The good news about pet food and pet spending in general, putting aside veterinary care — veterinary care is a whole separate category — is that pet spending is one of the most resistant to business cycles of any consumption category that there is taken as a whole. Now, what do I mean by “taken as a whole”? That doesn’t mean that people don’t necessarily trade up or down depending on good times or bad times within that category. Pet brands still need to think strategically about pricing strategy and whether they are pricing optimally for market share, given the economic outlook, given where consumer incomes are, and what makes sense, given their market, given their brand, etc.

As a category of spending, it’s fascinating. Pet spending has virtually no responsiveness to business cycles since 1987. It’s what we would call an “acyclical category.” There are three types of responses to business cycles. There’s acyclical which means your category of spending just isn’t responsive to business cycles at all. There’s procyclical, which means that you increase your spending with good times and decrease it with bad times. That’s most spending, frankly, which, you know, I think makes sense. Then there’s countercyclical, which is when times are bad, you increase your spending on something. There’s not a lot of spending categories that are countercyclical, but there are a few interesting ones, like tobacco is countercyclical, which I guess makes sense if you think about it. Higher education spending is countercyclical, which also might make sense if you think about it. If you are less likely to have a job, then maybe you spend more money investing in higher education spending, skilling up while you don’t have a job. That could make sense. Going back to pet food spending, the good news in terms of the economic anxiety that we have now and the economic downturn that might happen this year, is that as a category, pet spending is largely resistant to business cycles.

One caveat is that veterinary care, which I said at the very beginning is a whole separate category, is among the most procyclical categories.

Pet food and pet good spending is acyclical; veterinary care is among the most procyclical. What that means is that when times are bad, veterinary care is one of the first things that people cut down on, which I thought was fascinating and something else to keep in mind about the relationship of people, their spending habits, business cycles, and their pets.

The other caveat, though I would give about pet food spending, especially in the United States, is that pet food spending surged as a share of income in the wake of the pandemic. When you look in aggregate, it went from roughly 0.4% of income, to 0.5%, almost 0.6% of income. These sound like small numbers but remember — this is a tiny category of overall spending. As a share of income, this is an enormous level shift of consumption in one category.

After that shift happened early in the pandemic, spending on pet care as a share of income then began trending down a bit, renormalizing a bit. Now, it’s still higher than it was pre-pandemic, and if you look at pet spending in nominal terms, it’s still rising a little bit and still higher than it was pre-pandemic.

Income is rising faster than nominal pet spending is as of 2024. What this is telling me is that people early in the pandemic probably got a lot of pandemic pets that had all sorts of spending obligations that came with it. Some of that has rolled off over time, over the last four years, and there has been a little bit of normalization.

What I think is happening is that overall pet spending is higher than it was, and we should expect it to stay higher than it was pre-pandemic. In terms of year-on-year growth, it was always going to be a bit weaker this year than it was over the last couple of years because of that post-pandemic renormalization. When you layer on top of that the possibility that we might have a downturn this year, and we can talk in a moment about the macroeconomic outlook for the year, I think that that might exacerbate that and create the possibility of — again, pet food spending is acyclical so I would not expect this to greatly harm pet food spending — but I think that it would create the conditions for a slowdown.

Beaton: Let’s talk about the potential slowdown. Pet food is a global business, and a lot of my audience is international. I would say most of my audience has at least one international partner, be it to supply packaging or to supply a particular specialty ingredient or a vitamin or a mineral or they sell internationally.

When you put all that together with what’s going on right now, I know that there’s a lot of uncertainty in the business sector about what to do, how to prepare your business plan for the year, how to prepare your business plan for the next couple of months. What is going on right now, Ernie?

Tedeschi: (laughs) First of all, we’re recording this podcast on March 12, so I’m going to talk specifically. Listeners should know that by the time they listen to this podcast, the information we talk about might be stale at that point, because things are changing so rapidly on the ground on an hour-by-hour basis. It’s hard to keep up with.

Obviously, trade tensions are rising. There was a slate of tariffs that is coming out from the United States. They are in place with China. As of right now, there are 20% tariffs being placed by the United States on all Chinese imports. There are a series of tariffs that are being threatened by the United States on Canada and Mexico now. There are lots of exceptions on those Canadian and Mexican tariffs. For example, if you have goods coming into the United States from Canada and Mexico that are part of the USMCA agreement, what used to be called NAFTA and was renegotiated as USMCA, if it falls under that agreement, they’re exempt from those 25% tariffs.

This is not a trade podcast. We’re not going to go into what falls under that agreement, but basically, any goods that have an origin in Canada and Mexico, like they were grown in Canada and Mexico, or they had substantial production in Canada and Mexico, rather than passing through Canada and Mexico, they’ll probably be exempt under USMC.

To be clear, there’s a lot of trade with Canada and Mexico that does not fall under USMCA. Roughly half of goods are not part of USMCA and would still be potentially subject to these as of right now, 25% tariffs.

We’re also looking now at possibly 50% steel and aluminum tariffs. Then, there’s this threat of reciprocal tariffs on all countries worldwide from the United States. Again, don’t need to get too deep into that, but the idea being that if there are tariffs that other countries place on the United States, or also value-added taxes that countries have domestically that they use to raise revenue, the United States is going to consider both of those trade barriers, and they’re going to match them. They’re going to match any tariffs that are placed in the United States. They’re going to match domestic value-added taxes on other countries.

That policy is extremely uncertain at this point, but it has the potential to lead to very high tariffs on certain countries, in particular European countries, because European countries often have high value-added taxes domestically. It’s a first-tier source of income for those countries.

What does that mean for pet food? Let me start within the United States then broaden it internationally and macroeconomically. If you’re an American consumer in American business, the good news is that only about 4% of U.S. pet food in the United States is imported right now, right? If you’re an American consumer, the tariff debate strictly from a consumer of U.S. pet food isn’t that relevant to you. Most of the pet food that you buy is probably domestic or to the extent that it’s imported, the number one importer of pet food into the United States comes from Thailand.

Thailand has been a peripheral part, if at all, in any of these trade discussions. Thailand could be a target of the reciprocal tariff debate, but again, the main target of the debates that have been happening in the United States so far have been Canada, Mexico and China.

The bad news is at the industry level within the United States. Number one, the United States has a trade surplus when it comes to pet food. That is, we export more pet food than we import. If you are a pet food producer in the United States, the trade war is bad news for you.

Layering on top of that, 50% of the pet food that we export as the United States goes to Canada alone, one of the three main parts of the trade war. Another 10% goes to Mexico. Already we’re talking about almost two-thirds of U.S. pet food exports going to North America.

One of the consequences of the trade war also could very well be a stronger U.S. dollar. A stronger U.S. dollar makes U.S. exports less competitive to everyone, whether you’re a pet food exporter, whether you’re a stapler exporter, you know it doesn’t matter. All U.S. exports are less competitive if the U.S. dollar is stronger.

Now, currency markets are very complicated. I will say that the U.S. dollar did appreciate for a little bit. It’s come back down as there’s been more economic anxiety. I’m not making a prognostication about which direction it’s going to go, but one of the byproducts of tariffs is that it puts upward pressure on the U.S. dollar, and that’s bad news for manufacturers. That’s something that people should keep in mind.

The last thing I’ll say here, too, is that all of this together, is creating a lot of anxieties about growth prospects for the year, and I’ll plug this again at the end, but at The Budget Lab, we’ve done a lot of work on the economic and the distributional and the fiscal effects of tariffs, especially in the American context. To give you an idea, the China, and Canada and Mexico tariffs — so the 20% China, the 25% Canada and Mexico tariffs — if they went fully into effect, that would shave about a percentage point off of growth in 2025.

Now let’s be sober about this. Notice what that means — 1% off of growth in an economy that normally grows at 2% a year. That’s not recessionary by itself. Remember, the Canada and Mexico tariffs are right now not fully in effect. There are all sorts of exceptions, as I was talking about, because of USMCA and for other reasons as well, so those are not fully implemented. Just from a purely mechanical standpoint, this is not a question right now in terms of recession or not recession. I think that’s the wrong way to think about it.

I do think this policy is a headwind to growth — it slows down growth. Going back to what I was saying before, the good news for pet food manufacturers, if you’re thinking about the American consumer, is that the American consumer generally doesn’t buy pet food as a category regarding the broader macroeconomy. Pet food consumption patterns don’t follow the broader macroeconomy. The brands that they buy might, so there might be some substitution among brands, but pet food consumption should be robust to whatever slowdown that we see this year.

Also, as I was saying before, we might have already expected a slowdown in pet food consumption anyway, because of that post pandemic renormalization, and if you are a domestic U.S. producer that exports, because of this trade war, you might expect a slowdown because of stronger dollar retaliation from other countries. All sorts of uncertainty. I would not panic about the economic outlook for 2025 and 2026. By the same token, I don’t think that there’s a lot of good news over the horizon at this point.

Beaton: One of the things that happened during the pandemic is that innovation slowed down in the pet food industry because businesses kind of pulled back. There was so much uncertainty, there was so much going on, that it was a riskier prospect than usual.

Is that something that you expect to see, or that you think pet food businesses should do right now when we can’t even plan two months out what the economic state of things is going to be? Is that the right way to go — to be more conservative and hold back? Or should the pet food business try to go “business as usual” in terms of … I mean, there’s so much there — the supply chain implications, there are consumer spending implications. What do you feel is the best conservative to optimistic mix right now for them?

Tedeschi: Nobody knows their customers and their business and their supply chains like the brands themselves. I’m not going to give one-size-fits-all advice. I will say that one of the consequences of this type of uncertainty that we’re seeing is exactly what you just said, which is that businesses in general, not just pet food businesses, but all types of businesses sit on their hands and are reticent to make — not even long-term but medium-term investments in productive expansions, new technologies, that sort of thing, because they’re not sure what their future business or future markets are going to look like.

Businesses do that, not because they’re in error, but because it makes rational sense. It’s a way to manage risk in this type of extreme uncertainty. To put the level of tariffs in perspective, people ask me, we’ve had recent trade wars. Isn’t this like the tariffs that we had a few years ago? Well, back in 2018, the United States placed tariffs on products, from China, some products from Europe as well, and there was a bit of a trade war. But that trade war was really focused on, for the most part, on specific products, like washing machines — very narrow and surgical. The average tariff rate went up for the United States, but it only went up a little bit. If the average tariff rate going into the middle of the 2000s was 1% of all imports, which historically was extremely low for the United States.

Going into this year, it was maybe 2%, 2.5%, so it had not gone up very much over the last four years because of prior trade wars. If the 20% China, 25% Canada and Mexico tariffs were fully in effect, and as I said before, they’re not fully in effect, but if they were fully in effect, the average tariff rate would be closer to 10% rather than 2.5%. That gives you a sense of we’re just an order of magnitude higher than other recent trade wars that we’ve had back in 2018.

This is a whole other ball game. By the way, that 10% would be the highest average tariff rate that the United States has had since World War II. We don’t have any recent precedent for this level of tariff and this amount of uncertainty on a day to day, week to week, basis.

Businesses, particularly businesses that deal primarily with the United States, Canada, Mexico, Europe — advanced economy countries that don’t tend to rely on tariffs, they don’t know logistically how to deal with tariffs. It makes a lot of sense for them to at least temporarily pull back, take a breath and think about how to risk manage this.

Now, obviously there’s a point at which that goes too far, because I think that there are opportunities here for a business to potentially win market share or to have a competitive advantage, but obviously there’s a lot of risk. The companies that will fare the best here are the companies that have dealt with emerging market countries, countries that have always had tariffs, so those countries know how to deal with this type of trade risk or type of political risk on a high frequency basis. For them, it’s not a good thing, but it’s the cost of doing business, and perhaps they’re already well hedged against it.

It’s something other businesses will have to get used to. In the meantime, I think you’re exactly right. One of the consequences of this is that innovation, at least temporarily, is probably going to go down.

Beaton: As we wrap up this conversation, which could go on a lot longer, is there anything that pet food companies, suppliers, manufacturers, anybody in the space, can look to as a guide? Is there a canary in the coal mine we should all be following? Is the canary already dead? How can they possibly stay on top of all of this? Is there anywhere they can go to really feel better about the decisions they’re making, or just avoid decision paralysis, which I know can also be a huge thing during times like this, where you just don’t know what to do, and it all starts to feel impossible from a business level.

Tedeschi: Great question. Here’s where I would go back to. I would go back to the fundamentals of the business. As I tell different brands, nobody knows their customers or their businesses like they do. Put aside the news cycle and the day-to-day and the week-to-week uncertainty. The bottom line here is that you’re in a business that, like I said, is quite acyclical in terms of categorical spending. You have consumers that are overall facing elevated economic uncertainty, and they are still exhausted with inflation coming out of the pandemic.

The good news is that they’re probably not going to take that out on pet food, but they are going to welcome any relief that they can get from any brands. Whether that’s because they’re exhausted with high egg prices and they’re not seeing relief there, or that’s because there are layoffs with the U.S. federal government. Whether that’s because there is broader economic uncertainty and people are looking for any way to possibly save as a sort of piggy bank cushion against the possibility of a downturn later in the year or next year. That’s the macroeconomic environment this year.

Pet food companies should think about ways they can take advantage of that. There are ways they can take advantage of that. If they have any pricing power, there’s a lot of opportunity there to win customers and win customer loyalty. If there are luxury brands of pet food that have or have been thinking about, sort of spinning off a middle or a low-end brand as a way of capturing market share among different customers, now is not a bad time to think about rolling that out.

Like we were talking about before, there is enormous uncertainty and there’s a lot of risks. It should not surprise us if investment in innovation comes to a pause. At the same time, we should not panic. In particular, pet companies should not panic, because we have really seen a structural increase in pet consumption over the last several decades as a share of income.

A lot of that has to do with demographic changes. As people have fewer kids, they seem to be substituting toward pets. Also, as people get richer, they seem to be more likely to get pets and buy pet food. When you zoom in on the very short run, there is uncertainty and there are ups and downs and idiosyncratic things that can affect the industry. But when you zoom back out, the long run, structural trends affecting the industry, are still good, and that needs to be kept in mind when making investment decisions.

I don’t think a trade war or even a short run recession are going to change that. As a matter of fact, in the last two recessions that we’ve had — the 2008 recession and the pandemic recession — when those recessions hit, those were the two periods where pet spending as a share of income surged the most in recent history. Within months of those recessions being declared, that’s when pet spending as a share of income increased the most. In a funny way, this industry might have less to fear from a downturn than a lot of other industries right now. As a result, maybe it has less to fear from investment in innovation as well.

Beaton: Thanks so much for speaking with me today, Ernie. We certainly had no shortage of things to talk about. I know for the people listening, we were not able to cover everything. This could have been an hours-long podcast.

Tedeschi: Easily.

Beaton: I do think you’ve given the audience somewhere to start untangling it all. Lucky for them, you will be at Petfood Forum and available to answer questions, so whatever the landscape is, by then, we will be able to speak to you again.

Thank you so much for being on. I know you’re probably in high demand right now, and there’s a lot going on, so I appreciate you trying to make sense of some of it for us.

Tedeschi: Thanks for having me on, Lindsay. This was fun.

Beaton: Before we go, I always like to do a plug for my guests. Where can people find more information about you and the work you do?

Tedeschi: If you go to budgetlab.yale.edu, you’ll find the landing page for The Budget Lab at Yale. You’re going to see a lot of analysis on tariffs in particular right now, because that’s the hot topic of the day.

As Lindsay said at the beginning, we’re a nonpartisan fiscal and economic think tank, so everything we do is nonpartisan, very analytical. One thing listeners might find particularly interesting there is that we have an analysis of a possible reciprocal tariff. I think that that’s something that I haven’t seen anyone else do, so check that out if you want more information about possible economic impacts of that.

Beaton: Excellent. Once more, Ernie will be presenting “Macro-economic outlook and what it means for pet food companies and pet owners” at Petfood Forum 2025’s opening keynote. Petfood Forum will be held April 28-30 in Kansas City, Missouri, U.S. You can find more information about Petfood Forum at PetfoodForumEvents.com. We hope to see you there!

That’s it for this episode of Trending: Pet Food. You can find us on PetfoodIndustry.com, SoundCloud or your favorite podcast platform. You can also follow us on Instagram, @trendingpetfoodpodcast. And if you want to chat or have any feedback, I’d love to hear from you. Feel free to drop me an email: [email protected].

And of course, thanks again to our sponsor, AFB International, the premier supplier of palatants to pet food companies worldwide, offering off-the-shelf and custom solutions that make pet food treats and supplements taste great.

Once again, I’m Lindsay Beaton, your host and editor of Petfood Industry magazine, and we’ll talk to you next time. Thanks for tuning in!