Caution Ahead of Key US Economic Data and Govt Shutdown?

The stock market may continue to trade cautiously this week as the federal government risks a shutdown and key US economic data are not expected to change the overall picture.  However, there is reason to think these factors may be taken in stride.  Both the September Mfg ISM and Nonfarm Payrolls are seen improving somewhat from their August prints.  However, their improvement is expected to be modest and should not change the markets' probabilities of further Fed easing.  A more positive market tone could reemerge afterwards as Q325 corporate earnings are released.

Consensus looks for Nonfarm Payrolls to rise by only 39k m/m, versus +22k in August.  However, the latest Unemployment Claims data suggest the risk is for a somewhat larger increase.  Consensus estimates for the other important parts of the Employment Report are more of the same: a steady 4.3% Unemployment Rate and 34.2 Nonfarm Workweek, and 0.3% m/m Average Hourly Earnings.  Rounding analysis suggests a better chance of a 3.4% than 3.2% Rate.  The unrounded Unemployment Rate was 4.32% in August.  Consensus prints shouldn't change the Fed's view of the outlook -- still cautious but not overly concerned about the economic outlook.

Consensus looks for the September Mfg ISM to edge up to 49.2 from 48.7.   This would remain at a level suggesting modest economic growth.   It would be a bit below the 49.4 H125 average.  Real GDP Growth averaged 1.6% (annualized) in H125.

The stock market has not liked government shutdowns in the past.  However, it may be different this time for two reasons.  The long end of the Treasury market appears to be sensitive to large shifts in the 10-year projection of the Federal Deficit, as seen in a rise in yields when the courts threatened an end of Trump's tariffs.  The government revenue impact became more important as the inflationary impact has so far been modest.  The markets may view a shutdown as a way that Trump will cut government spending.  And, it would prevent the renewal of some government subsidies being pushed by Democrats.   

Consensus looks for about 7.5% (y/y) growth in Q325 corporate earnings.  This is below the 12.0% seen in Q225.  However, it is still strong.   And the consensus estimate tends to be too low, so a stronger quarter is conceivable.  The macro evidence supports this risk.  Real GDP Growth sped up on a y/y basis,  based on the Atlanta Fed model's estimate for Q325.  The dollar weakened as economic activity abroad improved.  Both boost earnings made abroad.  There is a possibility that domestic profit margins improved, as the Core CPI climbed by more than Average Hourly Earnings.  Although some of the strength in the CPI reflects tariffs, which don't lift profits themselves, they offer domestic producers room to increase profit margins.  Finally, there should be a smaller drag from oil companies. 

                                                                                                                                      Markit
                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level)

 Q124            2.9                +14.0                  0.0                              4.3           3.8              46.4 

Q224            3.0                  +2.5                +3.0                              3.9           3.4               46.3 

 

Q324            2.7                  -6.0                 +2.5                              3.8           3.2               45.3     

 

Q424            2.5                   0.0                 +3.5                              4.1           3.4               45.4       

 

Q125            2.1                  -6.5                +6.0                               3.9           3.1               47.6                                       

Q225            2.0                -16.0                +3.5                               3.9           2.8               49.3     

 

Q325            2.2                -11.0                -1.5                                3.8           3.1               50.0                 

                                                                           

* Based on the Atlanta Fed Model's latest projection of 3.9% for Q325 (q/q, saar).

 

A Growth-Friendly Fed

The stock market should continue to be buoyed by a growth-friendly Fed.  The 25 BP rate cut shows the Fed will respond to economic weakness.  And, the "dot" plot indicated a leaning toward further easing by most members of the FOMC meeting.  Fed Chair Powell and other Fed officials will likely reiterate the Fed's new emphasis on the downside risks to the economic outlook in speeches this week.

Soft US economic data, in real terms or inflation, should support expectations of further Fed easing and thus be positive for the stock market.  And, most of this week's US economic data are expected to be on the soft side.  Consensus looks for August Durable Goods Orders to dip, both in Total and Ex Transportation.  It also expects declines in August New and Existing Home Sales and a rebound in Initial Unemployment Claims.  The August PCE Deflator is seen up a modest 0.2% m/m for Core.  However, August Consumption is expected to rise 0.5% m/m -- a  decent gain even after adjusting for inflation.

The Fed expects modest economic growth and a temporarily higher pace of inflation into early next year, according to Fed Chair Powell at his post-meeting news conference.  The 1.4-1.7% Central Tendency Forecast for 2025 (Q4/Q4) implies 1.4-2.0% Real GDP Growth for the second half of the year, given the 1.4% growth in the first half.  If the Atlanta Fed Model's estimate of 3.3% for Q325 Real GDP and the Central Tendency forecast are right, then Real GDP has to weaken t o -0.5% to +0.7% (q/q, saar) in Q425. Except for a possible recession in Q425 in this scenario, the annual Central Tendency forecast is at or slightly below the Fed's estimate of longer-run growth.

Such a growth pace would likely be acceptable for the stock market inasmuch as labor costs should remain contained.  Powell acknowledged that wage inflation has moderated and that both labor demand and supply have fallen.  Although the pass-through of tariffs has been slower and smaller than the Fed expected, it still sees the tariffs to be more fully passed through over time -- a positive for the path of corporate earnings.  Specifically,  the Fed looks for the tariffs' boost to prices to grow through the rest of the year and possibly into 2026.  

The future path of monetary policy will depend on economic developments ahead, but the likely direction is for lower rates.  Although there was only one vote for a 50 BP rate cut at last week's FOMC Meeting, nine of 19 participants look for 2 or more 25 BP cuts this year.  There are reasons to expect a persistence of the current combination of modest growth and moderate inflation for the rest of the year, supporting more rate cuts.  The slowdown in immigration has been a major factor holding back labor force growth (and a negative for demand for goods and services).  This restraint is not going away.  And, besides modest wage inflation, most measures of longer-term inflation expectations continue to be consistent with the Fed's projections, according to Powell.   This is not the case, however, with the University of Michigan Survey's 5-Year Inflation Expectations figure, which, at 3.9% in mid August, is well above its 3.0-3.2% pre-tariff range.  The final print for the month will be released this week.

A rising stock market would be desirable for the Fed, since it is a major channel (via consumption) through which easier monetary policy supports the economy.  Lower short-term rates also help through the reduction in borrowing costs on credit cards and auto loans.  However, the channel through lower longer-term yields may be hampered in the near term by their being lifted by the variability of short-term rates and the dollar.  They raise the risk premium in the term structure of interest rates.

 

 

 

 

A 25 BP Fed Rate Cut, More To Come?

The stock market rally should be sustained by this week's FOMC Meeting.  Besides a 25 BP rate cut, the Statement or, more likely, Fed Chair Powell could signal that more easing will be coming if needed.  And, this week's US economic data are expected to keep that possibility alive by underscoring a sluggish growth pace.

A Fed easing path will likely embody a number of 25 BP rate cuts.  There are several reasons to expect such a cautious path.  First, inflation remains higher than target, with the culprits including more than just tariffs.  In particular, housing rent (primary and owners' equivalent rent) continue to run 0.3-0.4% m/m.  It likely needs to slow to 0.2% in order for the Fed to hit its 2% inflation target.

And, tariffs remain a problem for the inflation fight, although there were some signs of a moderation in their impact in the August CPI.  A jump in Food Prices At Home in August may have been caused in part by tariffs.  The unusually large 0.6% in these prices most certainly is a factor behind the depressed level of consumer confidence.  In contrast, Household Furnishings and Recreational Commodities flattened out after a couple of months of large increases, suggesting the impact of tariffs on them is settling down, in line with the Fed's best guess that the tariffs will have a one-off impact on inflation. 

Nevertheless, the Fed may be concerned by signs that longer-run inflation expectations have ratcheted up.  The University of Michigan Consumer Sentiment Survey shows 5-year inflation expectations at 3.9%, well above the 3.0-3.2% range seen before the start of tariffs.  

As a result, allowing a somewhat softer labor market for a while may be optimal monetary policy in the context of tariffs.  It would prevent a wage-price spiral from developing by dissuading labor from bargaining for higher wages to offset the loss of purchasing power.  The Fed would never admit to this reason.  However, Powell acknowledges that wage inflation has not been a source of inflationary pressure, showing that Fed officials are cognizant of this potential.

A sluggish pace of economic growth is expected to be apparent in this week's US economic data releases.  Consensus looks for a slowdown in Retail Sales to 0.3% m/m in August from 0.5% in July.  Ex Auto Sales are seen repeating July's modest 0.3% increase.  This gain is even smaller in real terms, that is once inflation is taken into account.  Consensus sees flat August Industrial Production after -0.1% in July.  There is downside risk from a likely decline in Manufacturing Output after a flat July.   Consensus expects little m/m change in August Housing Starts and Permits.

 

  

Green Light For A Fed Rate Cut

The stock market should continue to climb this week, anticipating a Fed rate cut at the September 16-17 FOMC Meeting.  After the soft August Employment Report, this week's release of the August CPI should not derail the expected decision.  A rate cut, even a modest 25 BPs, would signal that the Fed will act to combat economic weakness ahead -- making the possibility of future economic weakness less problematic for stocks.

The consensus estimate of 0.3% m/m for Total and Core CPI looks reasonable, as the tariff impact should still be noticeable -- which the Fed could view as unavoidable but temporary.  A lower Core is not out of the question, nonetheless, but probably requiring a slowdown in Owners' Equivalent Rent to 0.2% from 0.3%.  Consensus has the Core's y/y steady at 3.1%.  However, a rounded-up 0.3% print could result in a dip in the y/y to 3.0%.  The markets may pay attention if this happens.

The August Employment Report already gave the Fed the excuse it needed to cut rates at the September 16-17 FOMC Meeting.  Besides soft job growth and an uptick in the Unemployment Rate, Total Hours Worked are down q/q in Q325.

The +22k m/m increase in Nonfarm Payrolls was the 4h month in a row of only a double-digit gain.  It was well below the 125k m/m increase consistent with a steady Unemployment Rate (and steady labor force participation rate).  The Diffusion Index (percentage of industries with job gains) stayed below 50%: 49.6% versus 48% in July).  There were declines in cyclical sectors, like Construction and Manufacturing, but also in Professional and Business Services (some of which conceivably could be tied to AI).

The uptick in the Unemployment Rate to 4.3% from 4.2% can be attributed to an increase in the Labor Force Participation Rate.  However, there were some troubling signs from the Household Survey.  The politically sensitive Black Unemployment Rate continued to climb, rising to 7.5% from  7.1% (mostly women).   And the Duration of Unemployment rose for the second month in a row.  The broadest measure of Underutilized Labor Force, U-6, rose to 8.1% from 7.9%.  This is its highest level since October 2021.

Average Hourly Earnings remained at trend, rising 0.3% m/m.  However, only 7 of 13 sectors had changes of 0.3% or less, compared to 11 of 13 in the Q225 average.  So, while the wage data have good news overall for the inflation outlook, there is not yet an all-clear.  Nevertheless, it should have assuaged some Fed concern about the potential for a wage-price spiral emanating from the tariffs.

With the Nonfarm Workweek unchanged from a downward-revised 34.2 Hours in July, Total Hours Worked were flat in August and are 0.5% (annualized) below the Q225 average.  As a result, the Atlanta Fed model's 3.0% estimate for Q325 Real GDP Growth continues to look too high.  However, if it is correct, it would be because of strong productivity growth -- a positive for Q325 corporate earnings and stocks.

Stock Market Helped By Benign Data and Court Ruling?

The stock market may be buoyed this week by expectations of a Fed rate cut, as the August Employment Report is expected to be soft.  A consensus-like Report would likely pave the way for a Fed rate cut at the September 16-17 FOMC Meeting.  Also, the Appeals Court ruling against most of Trump's tariffs could mollify some of the markets' and Fed's concern about the inflation outlook.

Consensus looks for a sub-trend +78k m/m increase in August Nonfarm Payrolls, slightly more than the +73k in July,  Both are lower than the +115k that would keep the Unemployment Rate steady, assuming no change in the Labor Force Participation Rate.  Moreover, the Unemployment Claims data tilt toward an even smaller Payroll increase in August than in July.  Consensus looks for the Unemployment Rate to tick up to 4.3% from 4.2%, which is a reasonable expectation based on the Claims data and the rounding analysis discussed in last week's blog.  Consensus also expects Average Hourly Earnings to climb a trend 0.3% m/m, the same pace as in July.  A trend increase would argue against a wage-price spiral being triggered by tariffs.  The consensus estimate of a steady 34.3 Hour Nonfarm Workweek would allow for an increase in Total Hours Worked in August and Q325, suggesting that economic growth is continuing.

Other key data this week should support the idea of modest economic growth, according to consensus estimates.   The Mfg ISM is expected to edge up to 48.6 in August from 48.0 in July.  Both are associated with Real GDP Growth of 1.5-2.0%.  The Services ISM is seen up a bit, as well, to 50.5 from 50.1.    

In contrast to the expectation of modest job and economic data, this week, the Atlanta Fed Model's estimate of Q325 Real GDP Growth was strong, revised up to 3.5% from 2.2% (q/q, saar), thanks mostly to a shift from a subtraction to an add by Net Exports.  However, this shift looks questionable given the wider Trade Deficit in July.  The latter was caused mostly by a rebound in imports of industrial supplies, which could have been due to higher prices as the model apparently assumed.  Nevertheless, the 3.5% GDP estimate should be viewed with caution.  The Model's estimate is still early, and softer data for August and September would pull it down.  So, at this point, the Model's estimate of strong Q325 Real GDP Growth should not stand in the way of a Fed rate cut as long as the August Employment Report is soft.

As for inflation, the July PCE Deflator was benign and should not be an impediment to a rate cut, particularly considering tariffs had some impact that could be temporary.  The Core PCE Deflator rounded up to 0.3% from 0.27%.  And, the Market-Based Core PCE Deflator rose only 0.2%.          

The Appeals Court's ruling against most of Trump's tariffs needs to be affirmed  by the Supreme Court to significantly reduce the markets' and Fed's concern about their inflationary impact.  Even without the termination of the tariffs, Trump's policies and actions have mixed implications for inflation.  

/1/ Tariffs will almost certainly boost prices -- putting aside the possibility that the Supreme Court will affirm the negative ruling of the Appeals Court -- as will Trump's weak dollar preference.  However, there are caveats that could dampen their impact on prices.  If companies are slow to pass through the higher costs of imports, the price level will eventually fully reflect them but the boost to inflation -- the rate of change of prices -- will be modest and extend for a longer time than if the tariffs were fully passed through immediately.  In other words, US purchasing power will be reduced slowly.   The other caveat is that foreign companies could lower their prices to maintain market share in the US.  In this case, there would be no increase in inflation.

/2/ If Trump's appointees force the Fed to lower the funds rate and keep it low, the risk is the policy will overly stimulate the economy as well as depress the dollar in the FX market,  Both would lead to higher inflation.  There are two caveats:  /a/ The policy could backfire: longer-term yields could rise in response to the inflationary threat, thereby pulling down stocks.  Both developments would hurt economic growth.  /b/ The easy monetary policy would not be inflationary if the economy is in the process of slowing sharply or falling into recession.  

/3/  If Trump damages the independence of the Fed, inflationary concerns will likely boost longer-term yields and depress the dollar.  In the short run, the former would hurt economic activity while the latter would lift inflation. 

/4/ Deporting illegal immigrants reduces the labor force, thereby tightening the labor market and putting upward pressure on wage rates. 

The yield curve would signal whether a Trump-forced monetary policy change would likely boost inflation or not.  A steeper curve, with longer-term yields having risen, would signal an inflationary implication and, ironically, hurt interest-sensitive spending such as housing -- the sector Trump thinks his easy monetary policy would help.

Some of Trump's actions have reduced prices.  He put pressure on the Saudis to keep oil prices down.  And, the drop-off in foreign tourism to the US in reaction to his tariffs may have held down hotel rates.  He also is putting pressure on pharmaceutical companies to lower prescription drug prices.  All these efforts have the undesirable effect of reducing incentives for domestic production and innovation, but they do help hold down inflation.

Trump's actions are not the only government policies that boosted inflation.  Some of the higher prices hurting the consumer may have been triggered by the hikes in the minimum wage during the past few years.  These hikes probably played a role in the surge of restaurant prices, for example.    

 

 

 

A Shift in Risks -- What Will Data Say?

Stocks may continue to be supported if not move up in expectation of a Fed rate cut at the September 16-17 FOMC Meeting after Powell kept open the door, acknowledging a possible shift in the balance of risks toward a softer labor market.  What will be important is evidence from upcoming data that economic growth has slowed and the labor market has indeed softened.

The important Unemployment Claims data support the idea that the balance of risks has shifted somewhat toward weaker economic growth and softer labor market.  Both Initial and Continuing Claims are slightly above their July average.  So far, they suggest a smaller increase in Nonfarm Payrolls in August than in July (+73k m/m Total, +83k Private).  And, they hint at an increase in the Unemployment Rate, which would put it above its recent range.  Note that the Unemployment Rate almost printed 4.3% in July, having rounded down to 4.2% from 4.248%.  The unrounded July level suggests a greater chance for the Rate to tick up than down in August.  A soft August Employment Report, due September 5,  would likely pave the way for a September Fed rate cut.

Powell also affirmed that the Fed is targeting 2.0% inflation, arguing that low, steady inflation is required to sustain a solid labor market.  Maintaining this target suggests the Fed will be cautious in easing, cutting by only 25 BPs in September and possibly skipping a cut at the following FOMC Meeting to see how inflation evolves.  Although Average Hourly Earnings in the August Employment Report will not likely be the critical component regarding a September rate cut, a 0.3% m/m or lower print would support the idea that tariffs are not leading to a broader pickup in inflation while a higher print could raise some doubt about this idea.

This week's release of the July PCE Deflator is expected to be a bit on the high side, up 0.3% m/m for Total and Core.  The y/y would rise for both.  High prints would not likely stand in the way of a September rate cut, as some of the increase is attributable to tariffs and could be one-off.  

Other data this week are expected to post modest gains, particularly after taking account of inflation.  July Personal Income and Consumption are seen speeding up to 0.4-0.5% m/m from 0.3% in June.  However, they would be up only slightly after adjusting for the expected 0.3% increase in the PCE Deflator.  July Durable Goods Orders are projected to decline sharply for the 2nd month in a row, likely resulting from a drop in aircraft orders.  The underlying Ex Transportation and Nondefense Capital Goods Excluding Civilian Aircraft are seen up slightly.  There is a risk the latter will rebound more sharply after falling 0.7% m/m in June.  The latter is a leading indicator of Business Equipment Spending, which Powell pays attention to.  But, a rebound should not get in the way of a September rate cut.

 

 

  

Jackson Hole Ahead, But What About Payrolls and Tariffs

The stock market will be focused on Fed Chair Powell's talk at the Jackson Hole Conference this week, looking to see whether he indicates a rate cut at the September FOMC Meeting is likely.  The Fed often has used this Conference to signal shifts in policy.  

The US economic data released since the July FOMC Meeting, however, has not been fully supportive of a rate cut.  The labor market has weakened a bit, seen by slightly higher Initial and Continuing Claims so far in August than in July.  While the large downward revisions in May-June Nonfarm Payrolls and modest increase in July painted a weaker picture of the labor market than did earlier data, the important Unemployment Rate remained in its low range.  Moreover, inflation has picked up, only in part a result of tariffs.  If Powell shifts away from a "wait and see" policy approach toward an easing, he probably will have had to canvass other FOMC members informally beforehand.  Keeping the "wait and see" approach while leaving open the door for an easing may be the most likely message in his speech.  Stocks may be disappointed with it, but any selling would probably be short-lived. 

Besides Fed policy, measurement of BLS Nonfarm Payroll data and the question of tariffs should continue to be a market focus.  Here are some thoughts regarding these issues: 

Accuracy Versus Timeliness in Payroll Report

Trump and his candidate to head the Bureau of Labor Statistics (BLS), E.J. Atoni, complain about the inaccuracy of the Nonfarm Payroll data.  There are two reasons why the Payroll data get revised each month.  First, BLS receives more survey responses after the first release.  Typically, about 2/3 of respondents file in time for the first Payroll release.  About 90% of respondents have filed by the time of the second revision.  Second, the seasonal adjustment process spreads some of the strength or weakness of the current month's Payroll data over the prior two months.  Their complaint focuses on the first reason.

Besides the monthly revisions, there is an annual benchmark revision.  The latter matches the level of March Payrolls in the latest year with the level measured by Unemployment Insurance data, which is not subject to sample error.  BLS will release an estimate of the benchmark revision to March 2025 on September 9.   

The trade-off between accuracy and timeliness in the Nonfarm Payroll data centers on whether a high degree of accuracy is more or less important than the usefulness of a timely print.  The US had decided that usefulness is more important, hoping that the estimation procedures to fill in for missing respondents will succeed for the most part in producing a near-accurate total.  The degree of success that it has had is debatable  The absolute average revision from the first to third print is 57k between 1979 and 2003 and 51k between 2003 and 2025.  In other words, a 100k first-print Payroll m/m increase, will likely end up about 50k or 150k after the two monthly revisions.  This could be important.  There has been more than one episode when Fed monetary policy would have differed if revised Payroll data had been the first print.

Trump's candidate is reported to have argued for the Payroll data to be released quarterly, presumably at the end of the subsequent quarter in order to get most of the responses for the third month of the prior quarter.  Doing so will likely make other labor market data more important for the markets and Fed.  These include the ADP Estimate and Unemployment Claims.  The latter is a universal count and not subject to sample error.  The BLS Household Survey presumably would remain monthly, since the data coming out of it, particularly the Unemployment Rate, is not revised.  Knowing the Unemployment Rate might be enough, since it would show (by decreasing or increasing) whether Payrolls are rising above or below trend.

Other US economic data could be difficult to measure without the monthly Payroll (and Average Hourly Earnings) data.   Labor Compensation in Personal Income is based on these data. 

 Trump's Tariff Policy And Causes Of Trade Deficit

Trump's tariff policy aims to shift production back to the US from abroad.  This shift will reduce the standard of living of the US, since it results in the loss of low-cost labor.  Domestic production is more costly than foreign production, otherwise domestic production always would have been dominant. 

Trump and others argue that foreign production is less costly because governments offer subsidies and hold down the value of the currency relative to the dollar.  The latter makes their exports cheaper in dollar terms, resulting in an on-going large trade deficit.  China is the main actor along these lines.  

There are others who argue that foreign governments are not the culprits behind the large US trade deficit. Instead, it is insufficient saving or over-consumption in the US.  This explanation carries a moral undertone, criticizing US behavior as spendthrift.  It implies that the US takes advantage of the global status of its currency to over-consume by running a perpetual trade deficit (perhaps underscored by the "strong dollar" policy of past Administrations). 

They base this argument on the national income identity that Domestic Saving equals Net Exports.  Negative Domestic Saving is associated with a Trade Deficit.  The Federal Fiscal Deficit is the main culprit of negative saving in the US.   If this is the real reason for the trade deficit (rather than the consequence of the actions of foreign governments), then Trump's tariffs are a clever way to solve the problem.  They increase US government revenue, regardless of who pays it, which increases national saving by reducing the Federal deficit.   And, they target and reduce the consumption of the goods (imports) that allow the US to over-consume.  

 

 

 

 

 

CPI, Labor Market and Compensation

The stock market rally should not be derailed if this week's inflation data match the consensus estimates.  Although consensus for the July Core CPI is a bit on the high side, it may be viewed by the market as not being high enough to worry Fed officials more than they already are.   The outcome of US/China tariff negotiations by the August 12 deadline could be more important.  Meanwhile, Unemployment Claims data may be adding to evidence of a softer labor market.

July CPI

Consensus looks for 0.2% m/m Total and 0.3% Core CPI for July, with the y/y edging up for both.  The estimate looks reasonable, with both upside and downside risk to Core.  Upside risk stems from a possibly bigger impact of tariffs than in June.  Also, seasonal factors switch to boosting from holding down some important components, such as Lodging Away From Home and Airfares.  And, New Vehicle Prices could move up as some discount programs ended.  Downside risk stems from a possible smaller impact of tariffs than in June and more discounting in response to soft consumption generally.  Also, Owners' Equivalent Rent could move down a bit from 0.3% to the lower 0.2% m/m trend seen in Primary Rent recently.

The market and Fed will probably be looking to see whether the components that seemed to be boosted by tariffs in June continued to rise sharply in July.  If they don't, the Fed's favorite view that the tariffs would only result in a one-time boost to prices would be supported.  This view is a reason why Fed officials would not be disturbed by a slightly high Core CPI.  From a market perspective, a consensus print would encourage expectations of a Fed rate cut at the September FOMC Meeting.

Unemployment Claims Data 

The latest Unemployment Claims data suggest a smaller increase in Payrolls in August than in July if Claims stay at these levels for the next few weeks.  Both Initial and, particularly, Continuing Claims are above their July averages in the latest week.

ADP Estimate Better Than Payrolls?

Aside from the inappropriateness of Trump's firing of the BLS director, the large revisions in Nonfarm Payrolls in May and June could make the markets pay more attention to the ADP Estimate of Private Payrolls.  The revisions brought the BLS prints significantly closer to the ADP Estimates for these two months (see table below).   

The ADP Estimate of August Private Payrolls will be released September 3 and the BLS Employment Report September 5.  The BLS estimate of the Payroll benchmark revision will be released on September 9.  The benchmark revisions will be incorporated into the Payroll data in the January Employment Report, due in February 2026.  

                                              Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS         

    March               155                          209                            120

    April                   62                          167                            133

    May                    37                          140                              69          

    Jun                    -33                            74                                3                                    

    Jul                    104                            83                               83       

  Labor Cost and Productivity Data

The Q225 data on Productivity, Compensation/Hour, and Unit Labor Costs have mixed news for the economy and inflation fight:

 1. The trend in Productivity Growth is back to its modest pace of the 1990s.  Although it popped to 2.4% in Q225, it was largely a rebound from the -1.8% in Q125.  The volatility reflects the measurement problem stemming from the large swings in net exports in GDP.  The y/y of 1.3%, which eliminates this problem, is lower than the increases seen in 2024 and 2023 (see table below).  Adding the 0.4% trend in Population, trend GDP looks to be about 1.7%, at the lower end of the Fed's 1.7-2.0% estimate of longer-run growth -- a modest pace.

 2.  Compensation/Hour -- the broadest measure of labor costs -- rose about 4.0% both q/q (annualized) and y/y in Q225.  Both are below the paces seen in 2024 and 2023.  So, this is good news for the inflation fight and in line with the slowdowns seen in Average Hourly Earnings and Employment Cost Index.

 3.  Taking both Productivity and Compensation/Hour into account, however, the trend in Unit Labor Costs (Compensation divided by Productivity) has moved up.  The y/y increase was 2.6% in Q225, higher than the increases seen in 2024.  

From the Fed's perspective, the downtrend in Compensation/Hour suggests the Unemployment Rate is at a level that is holding down labor costs.  However, labor costs may have to move down even faster if the trend in Productivity, which the Fed has no control of, does not pick up. 

                                                             Q225                         2024        2023                                 

                                                    [ q/q % *    y/y %]         [Q4/Q4 % change]

Productivity                                    2.4           1.3                    2.7            1.9                                  

Compensation/Hour                       4.0           3.9                    5.2            4.2      

Unit Labor Costs                            1.6           2.6                    2.4            2.3      

 * annualized                           

             

A "Wait and See" Fed

The stock market will be entering the seasonally weak month of August amidst uncertainty about the next Fed move.  Fed Chair Powell said the Fed is in "wait and see" mode until the September 16-17 FOMC Meeting, waiting to see if upcoming data lean toward economic weakness or higher inflation.   

Powell said that monetary policy is balancing the risks attached to its two mandated targets -- Unemployment and Inflation, not GDP Growth.  So, the most important real-side data for the Fed will relate to the labor market -- particularly the Unemployment Rate.  On the inflation side, the Fed likely wants to see if tariffs boost prices just once and for all or trigger a cascading lift-off in prices.  

It is not clear that upcoming data will provide a clear enough picture for the Fed to change policy by the time of the September FOMC Meeting.  And, Powell may keep the balance of risks argument to keep policy steady then.  Arguably, the Fed is relying on a balance of risk reasoning to cover for its real concern about the politically sensitive inflationary consequences of the tariffs.  This concern would suggest a longer waiting period than just the time to the September FOMC Meeting.  

In any case, the July Employment Report may not have been weak enough to move the Fed toward an easing.  Although job growth remained below trend, the 4.2% Unemployment Rate stayed in its recent range and Total Hours Worked pointed to continued GDP Growth in Q325.  (Indeed, the Atlanta Fed Model's early forecast is 2.1% (q/q, saar) for Q325 Real GDP.)  Wage inflation was steady. 

Fed Chair Powell admitted that the US economy had slowed over H125.  However, he emphasized that despite the slowdown, the labor market remained solid -- evidenced by the still low Unemployment Rate.  To be sure, there could be a delay before slow GDP Growth results in an increase in the Unemployment Rate.  So, Powell risks being late in adjusting his view of the policy risks by downplaying GDP Growth. 

Nevertheless, steady Fed policy now may be appropriate because the underlying trend in GDP growth may have slowed.  So, what looks like weak growth, in fact, may be neutral.  From the stock market perspective, a slower trend in economic growth is bad for corporate earnings (a negative) but helps hold down longer-term yields (a positive).

The underlying trend in GDP Growth may have ratcheted down because Population slowed sharply, to 0.5% (annualized) over H125 from 0.8% over 2024 -- presumably because of the drop-off in immigration.  In terms of GDP, the slowdown in Population would need to be offset by increases in Labor Force Participation (share of population employed or unemployed and looking for a job) or a speedup in Productivity Growth to keep the trend in GDP Growth where it's been.  

A caveat: Labor Force Participation may be related to the strength of demand for labor.  When people see companies looking for workers, they may decide to enter or re-enter the labor force.  An increase in Participation would temporarily allow for a stronger-than-underlying pace of GDP Growth without sparking inflation.   Keeping monetary policy unchanged may not give this Participation response a chance to happen.   

Powell also may be too accepting of the 4.2% Unemployment Rate.  While the Unemployment Rate is historically low, it may be close to a level that could be viewed as dis-inflationary.  This is because wage inflation has been fairly steady.  Average Hourly Earnings rose 0.3% m/m on average in 3 of the past 4 quarters as well as in July.  The Employment Cost Index was steady at 3.6% y/y in Q225 but in a slight downtrend excluding incentive pay.  Compensation/Hour -- the broadest measure of labor costs -- will be released next week for Q225.  Nevertheless, a dis-inflationary level of the Unemployment Rate would be desirable if tariffs have more than a one-time impact on prices and would not argue for an easing in monetary policy.  Perhaps that is why Powell is satisfied with the level.

 

 

A Boost From The Fed?

The stock market may get a boost from the Fed this week, either by a rate cut at the FOMC Meeting or comments by Fed Chair Powell opening the door for a September ease at his post-meeting news conference.  The macroeconomic data, showing modest growth and low inflation, don't stand in the way of a cut.  In particular, the slow economic growth in H125 may be enough to prevent the tariffs from spurring a wage-price spiral.  Wage data so far don't show any sign of acceleration.  And, the trade agreement with the EU may very well remove any hesitation on the part of the Fed to ease this week.  The 15% tariff is much less than the 30% Trump had threatened, so the inflationary risks are lower, as well.

Trump's visit to the Fed was unfortunate, tainting a Fed rate cut with the suspicion that it is politically motivated.  However, regardless of whether the Fed decides to bend to political demands or to move independently because a rate cut is desirable, Trump's comments suggest that a policy easing either this week or September is in the cards.  He hinted that a rate cut is coming, saying he doesn't think firing Powell will be "necessary," since Powell "will do the right thing."  

The Fed probably doesn't believe the choice of a July or September rate cut would make much difference for the economy.  The lags between policy change and the economy are long.  There could be a different impact on the stock market, however.  A July cut could cushion or reverse the typical weakness seen in early August.  In contrast, postponing an easing to September could allow a seasonal decline in stocks in August.  However, prospects for a September cut would likely make any seasonal weakness short-lived. 

Key evidence  on the economy will be released after the FOMC Meeting, including the June PCE Deflator, Q225 Employment Cost Index, July Mfg ISM, and July Employment Report.  Consensus estimates would confirm that inflation is under control and economic growth is modest.

Consensus estimates 0.3% m/m for the June Total and Core PCE Deflator.  Such an increase is a little on the high side, but could be taken in stride after 0.1%  prints in the prior 3 months.  Also, a 0.2% increase in the June Core PCE Deflator can't be ruled out.  Nor could a steady 2.7% y/y be ruled out, which could be the case if the m/m rounds up to 0.3%.  Any revisions to past months could affect the y/y, as well.   

The other important inflation-related report this week is the Q225 Employment Cost Index (ECI).  Consensus looks for 0.8% q/q, down from 0.9% in Q125.  Recent history supports expectations of a slowdown in the ECI.  This is because Average Hourly Earnings (AHE) slowed this quarter and AHE and ECI moved in the same direction in each of the prior 3 quarters (see table below).  Indeed, recent history suggests the Q225 ECI could come in below consensus, since ECI rose be less than AHE in each of the past 3 quarters.

This week's real-side data are expected to improve a bit from the prior month, but the levels are expected to remain low and support the idea of modest growth.  Consensus looks for Consumption to bounce to +0.4% m/m in June from -0.1% in May.  But, in real terms (that is, adjusting for inflation) it would be up only 0.1% and stand slightly below the Q225 average -- a soft take-off point for Q325 Real Consumption.  Real Consumption looks to have risen about 1.5% (q/q, saar) in Q225, up from 0.5% in Q125 but still modest -- which Powell will play close attention to, since it is a major part of Private Domestic Demand that he likes to track.

Consensus expects Private Nonfarm Payrolls to climb faster in July than in June (consistent with the implication of the Unemployment Claims data) but to stay low.  It sees +86k m/m versus +74k, staying below the +115k pace associated with a steady Unemployment Rate.  Total Payrolls are seen slowing to +102k from +147k, as the June end-of-school-year bounce in State & Local Government jobs unwinds.  Other parts of the Report are expected to be supportive of a Fed ease, with the Unemployment Rate rebounding to 4.2% from 4.1%, AHE moving back to the 0.3% trend (after a low 0.2% in June), and the Nonfarm Workweek remaining at a low 34.2 Hours (prior trend was 34.3 Hours).

The July Mfg ISM is expected to continue to indicate a sluggish manufacturing sector.  Consensus sees an uptick to 49.6 from 49.0 in June.  

The US-EU trade agreement, as well as the other recent trade agreements, will probably take time to affect the US economy.  When the large increase in US exports and EU investments in plant and equipment do occur, the markets would likely move to crowd out other spending if the economy is operating near full employment.  The net result would be little change in GDP.  Ironically, despite Trump's desire for a Fed rate cut, the latter would make a full-employment economy more likely by the time the spending from abroad hits the US economy.  To be sure, rate cuts could just offset the drag from higher import prices stemming from the tariffs.  The latter are essentially consumption taxes.  It will take time to see how all the fall-out from tariffs materializes.

                             (q/q percent change)

                          AHE                        ECI 

Q225                0.8                            na                 

Q125                1.0                            0.9

Q424                1.0                           0.9                                                

Q324                0.9                           0.8    

Q224                1.0                           0.9                     

Q124                1.0                           1.2

 

 

                     

 

 

Low Inflation and Slow Economic Growth: Recipe For Fed Ease

The stock market may continue to move up slowly in the face of corporate earnings this week, as there is still time for a trade deal before the August 1 deadline.  Hope for a Fed rate cut at the July 29-30 FOMC Meeting is supportive of stocks, but it is still a long shot without there being a deal with a major trading partner.  A deal could free the Fed's hands, since the macroeconomic data support a decision to ease monetary policy.  

Although Fed Chair Powell maintains that inflation risks outweigh slow-growth risks stemming from Trump's tariff threats, the data released so far suggest the opposite.  Inflation remains subdued and Real GDP Growth was below trend in H125.  Powell has acknowledged the policy implication in a recent speech when he said the Fed would be easing were it not for fear of the inflationary impact of tariffs.  And, to be sure, bigger tariffs are threatened to be put in place on August 1 if trade deals are not made.

The Core CPI remained subdued at 0.2% m/m in June.  While some components posted large gains, very possibly a result of the tariffs, other components were soft and dominated the overall print.  News articles emphasized the increase in the y/y pace to 2.9% from 2.8%, but the uptick had more to do with the very low print in June 2024 than the trend-like print in June 2025.  The annualized m/m change was 2.8% in June and is in line with the Fed's Central Tendency Forecast for 2025.  Besides the direct impact of tariffs not dominating overall CPI inflation, the flat June PPI shows that domestic producers have not boosted prices to take advantage of tariff-impacted import prices.  The PPI measures prices charged by domestic producers, while the CPI measures prices faced by consumers.  The absence of secondary tariff-related price hikes by domestic producers should be a relief to Fed officials that the tariffs may very well have only a one-off effect on prices.

Besides the low inflation prints, a decline in inflationary expectations should please Fed officials.  Both the short- and long-term measures of these expectations in the University of Michigan Consumer Sentiment Survey fell in mid-July.  In particular, the 5-year longer-term expectations have fallen for three months from a peak of 4.4% in April to 3.6% currently.  It is now just above the 3.0-3.2% range of H224.  

One reason for inflation staying low may be the modest pace of wage inflation.  The latter could reflect in part subdued economic activity.  The Atlanta Fed Model estimates Real GDP Growth of 2.4% (qq, saar) in Q225 after -0.5% in Q125.  GDP in both quarters, however, were likely distorted by measurement problems arising from large swings in imports.  Government surveys tend to have trouble capturing the full impact of imports on domestic spending components of GDP.  So, the jump in imports in Q125 (in anticipation of tariffs) held down GDP, although in theory there should have been a corresponding offset in another GDP component.  And, the subsequent drop in imports appears to be boosting GDP Growth in Q225.  The 2-quarter average of Real GDP Growth, which cancels out this measurement problem, is 1.0% -- below the Fed's 1.7-2.0% estimate of long-term potential growth. 

The Unemployment Claims data are still diverging.  Initial Claims fell further in the latest week, while Continuing stayed high.  These data suggest that while companies have pulled back from firing workers, they are reluctant to hire.

 

CPI, Labor Market and Fed Monetary Policy

The stock market may trade cautiously as it moves into the corporate earnings season this week, with the softer macroeconomic background suggesting uneven reports (see the June 29 blog).  Moreover, tariff developments could keep the market on edge, as could Administration pressure on Fed Chair Powell to resign.  Nevertheless, there are reasons to be optimistic about the market.  Tuesday's June CPI Report could lift expectations of a Fed rate cut at the July 29-30 FOMC meeting.  A rate cut would likely still be a long shot, unless there is some pullback in announced tariffs.  Europe's decision not to retaliate at this point is encouraging that a trade deal will be reached before the August 1 deadline -- a market positive.  However, it remains to be seen whether this will be the case.

Consensus looks for +0.3% m/m for both June Total and Core CPI.  This would be a bit on the high side and not lift expectations of a near-term Fed rate hike.  A consensus or higher print would likely reflect some impact from tariffs.  Also, Airfares should not be as weak as in April and May, since seasonal factors turn neutral after depressing them in those months.  However, a lower print for Core can't be ruled out.  Owners' Equivalent Rent needs to stay low at 0.3%.  More generally, importers may have lowered prices to offset some of the tariff and maintain market share.  And, the subdued wage inflation in the US, as seen in the June Employment Report, could help hold down price increases.  

While a low CPI print could fan expectations of a near-term Fed rate cut, the latter is still probably a long shot.  The June FOMC Minutes indicated only a couple of participants considering a July easing.   Most of the FOMC members were focused on inflation risks stemming from tariffs.   And, Trump's latest spate of large tariff announcements could make these members even more concerned.

The latest Unemployment Claims data have mixed implications about the labor market, but are not likely to concern Fed officials.  Initial Claims remain below the June average for the third week in a row, suggesting a pullback in layoffs.  In contrast, Continuing Claims are still high, suggesting that companies are reluctant to hire.  Uncertainty about the impact of tariffs could be weighing on hiring decisions. 

Despite the divergence between Initial and Continuing Claims, if both stay at their latest respective levels for the next few weeks, they would point to a speedup in July Payrolls -- outside of government jobs, which could drop as state & local education jobs unwind their June jump and some of the Trump cuts in federal government jobs show up.  Although the July Employment Report will be released after the next FOMC Meeting, the current levels of both types of Claims are probably not high enough to change the Fed's view of a solid labor market.  

Looking ahead, the imposition of tariffs could have two, opposite impacts on the labor market.  Relocation of US production from abroad should boost demand for labor.  However, the drag on demand for goods and services from higher prices should depress it.  The latter could have the more immediate impact, since it takes time to shift production to the US.  Another major factor whose impact on labor demand is likely to increase over time is the substitution of AI for workers.  So far, there is anecdotal evidence that this is happening.  The negative impacts on the labor market from these two channels could result in Fed easing at some point.

Away from the economy, a possibly significant hit to the stock market would likely result if Trump succeeds in removing Powell from the Fed Chair.  The "manufactured" controversy over the Fed's new headquarters could be the catalyst.  With a new Trump appointee expected to be quicker to cut rates, longer Treasury yields should rise and the dollar fall.  The former, particularly, would hurt stocks.

  

 

 

 

 

 

 

 

 

 

 

 

Misleading Tariff Deadline (?) and June Employment Report

The stock market has to contend this week with the July 9th deadline for trade negotiations.  However, there are a couple of reasons why a pullback could be modest.  First, Trump has said this deadline is not set in stone.  And, the Administration will be sending letters to some countries threatening an August 1st implementation of high tariffs if there is no trade agreement in place by the deadline.  This threat could keep alive hope for a market-positive resolution in July.   Second, the June Employment Report in fact should sustain hope for a Fed easing that should continue to provide underlying support for the market.

Although the headline prints for the June Employment Report appeared to be strong and belie the need for Fed easing, the real story is that the Report was weak and argues for a rate cut.  The stronger-than-expected +147k m/m increase in Nonfarm Payrolls was lifted by a 73k jump in Government Jobs.  A bounce in State & Local jobs more than accounted for the latter, with education jobs mostly responsible.  There may have been a mismatch between seasonal factors and school-year end this month.  More importantly, Private Jobs slowed sharply to +74k from +137k in May.  At the same time, the Nonfarm Workweek fell to 34.2 Hours from 34.3 Hours.  As a result, Total Hours fell  0.3% m/m and are 0.5% (annualized) below the Q225 average -- a weak take-off point for Q325.

The dip in the Unemployment Rate to 4.1% from 4.2% also belies labor market strength.  The decline resulted from a drop in the Labor Force, as the Participation Rate fell.  Civilian Employment rose a modest 93k m/m.  A lower Labor Force Participation Rate could reflect discouragement about job opportunities.  Including Discouraged Workers, the Unemployment Rate was steady at 4.5%.

Wage inflation seems to confirm a softening labor market.  Average Hourly Earnings slowed to 0.2% m/m from their recent trend of 0.3%.  The slowing was fairly widespread, as more than half of the major sectors saw AHE equal to or below their Q225 average.  On a quarterly average basis, AHE is on a slow downtrend:

                                Average Hourly Earnings (quarterly average of m/m % changes)

                                               Q225        Q125        Q424        Q324 

                                                 0.27          0.30            0.37        0.40 

Despite the weak ending of Q225, it still looks like economic activity bounced noticeably on a q/q basis.  Total Hours Worked in Q225 rose 1.8% (q/q, saar) after +0.7% in Q125.  The bounce could be attributed to a return to trend after bad weather held economic activity down in Q125.  The Atlanta Fed Model's latest projections is 2.6% for Q225 Real GDP Growth.  Real GDP fell 0.5% in Q125.

Meanwhile, the Unemployment Claims data so far don't suggest the weak ending of Q225 is snowballing.  Claims appear to have stabilized during June.  So, sluggish economic growth in Q325, rather than recession, remains likely -- which would not stop a Fed easing at some point.

 

 

 

 

 

Four Major Issues Facing the Stock Market

The stock market rally may pause or slow its ascent this week as it braces for several hurdles this summer.  The latter relate to the following issues: /1/ Will Trump extend the tariff postponement, /2/ Will the Fed ease,  /3/ What will be the outcome of the Tax/Spending Bill? and  /4/ How strong are Q225 corporate earnings.  Hope for a Fed easing at some point should temper a negative market reaction to an adverse outcome for the other three, if that's the case.  

At this point, it's unclear what Trump will decide to do when his 90-day tariff postponement expires, as he said they are not set in stone.  Expiration date for many of the countries is on July 9.  Postponement of Chinese-specific tariffs ends on August 12.  In addition, Trump has threatened to impose tariffs on a number of goods, which have not yet been set.  And, a Federal Appeals Court is weighing the decision of the Court of International Trade that tariffs on Canada, Mexico and China as well as "reciprocal tariffs" are illegal.  So far, from a positive perspective, Europe said a trade agreement with the US ahead of the deadline looks doable, with European purchases of US-made weapons the key.  Trump's ending of trade talks with Canada, though, although possibly a bargaining ploy, shows there are still hurdles to a more general resolution.    

Postponement or ending tariffs (presumably if the Appeals Court rules against them) would mitigate or remove a major concern that is keeping the Fed from easing.  Indeed, the macro background would not stand in the way of rate cuts,  Inflation appears to be easing as measured by the CPI and fairly steady as measured by the PCE Deflator.  And, economic growth is slowing.  The Atlanta Fed Model's forecast of Q225 Real GDP Growth is now 2.9%, down from 3.4%, with Consumption slower than expected.  Nevertheless, the Fed would likely be agreeable to some economic softening to prevent a wage-price spiral from developing as a result of tariffs.  So, Fed Chair Powell is likely to repeat his message that Fed monetary policy is now on hold at this week's ECB-sponsored meeting of central bankers.

Nevertheless, this week's June Employment Report is expected to support the idea of slowing growth.  Consensus sees +110k m/m in Nonfarm Payrolls, versus +137k  in May, and an uptick in the Unemployment Rate to 4.3% from 4.2%.  (Payrolls averaged 111k and Unemployment Rate 4.1% in Q125.)  Unemployment Claims data suggest the risk of softer prints for both Payrolls and Unemployment compared to May's.  Average Hourly Earnings are seen slowing to 0.3% m/m from 0.4%.  This would put them back to trend and is a positive for stocks.

Most of the public debate about the Tax Bill centers on the impact of the federal deficit over the next 10 years.  The Congressional Budget Office's (CBO) 10-year baseline projection assumes that Trump tax cuts will expire, consistent with current law.  CBO estimates that just extending them (along with the other provisions of the Bill) would boost the cumulative 10-year deficit by $4 Tn to $26 Tn.  This projection is a factor lifting longer-term Treasury yields.  However, the problem with not extending them is that the sequential jump in taxes would hurt economic growth.  So, it is more than likely that the tax cuts will be extended.  The other provisions of the tax bill, cutting Medicaid, food stamps, etc., would probably exert a modest drag on consumption and not hurt stocks much if at all.  In contrast, increased Defense Spending already is boosting growth, as seen in May Durable Goods Orders.  Defense Orders Excluding Aircraft rose sharply in both April and May, more than accounting for the increases in overall Ex Transportation Orders.  

Consensus looks for Q225 S&P 500 corporate earnings to rise about 5.0% y/y, well below the near-13% increase in Q125.  The macro evidence backs expectations of slower profit growth, as it is not as strong as in Q125.  US economic growth slowed further.  Profit margins may have narrowed, as the Core CPI rose by less than Average Hourly Earnings.  And, lower oil prices should have hurt oil companies.  On a positive note for profits, economic growth sped up abroad and the dollar was less strong -- so it cut the dollar value of earnings abroad by less on a y/y basis than in Q125.

                                                                                                                                        Markit
                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level)

 Q124            2.9                +14.0                  0.0                              4.3           3.8              46.4 

Q224            3.0                  +2.5                +3.0                              3.9           3.4               46.3 

 

Q324            2.7                  -6.0                 +2.5                              3.8           3.2               45.3     

 

Q424            2.5                   0.0                 +3.5                              4.1           3.4               45.4       

 

Q125            2.1                  -6.5                +6.0                               3.9           3.1               47.6                                       

Q225            2.0                -16.0                +3.4                               3.9           2.8               49.3     

                                                                           

* Based on the Atlanta Fed Model's latest projection of 2.9% for Q225 (q/q, saar).