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).

 

  

Caution After Iran Bombing, But Hope For Fed Easing

The stock market may trade cautiously this week, concerned about fall-out from the US bombing of Iranian nuclear facilities.  Most of this week's US economic data are expected to be on the soft side, sustaining stock-supportive expectations of Fed easing in H225.  And, the early signs from the Unemployment Claims data suggest a slower jobs gain in the next Employment Report, due July 3.  However, Fed Chair Powell's Congressional testimony this week could temper expectations of a near-term Fed easing as it should not diverge significantly from his post-FOMC news conference last week.  

Most of this week's US economic data are expected to be soft.  Consensus looks for declines in both New and Existing Home Sales for May.   May Durable Goods Orders are expected to show a small 0.1% m/m increase in the underlying Ex Transportation Orders.  And, the June Conference Board Consumer Confidence Index is seen up only slightly, remaining among the recently low levels.  May Consumer Spending is expected to speed up a bit to 0.3% m/m from 0.2% in April, but there could be downside risk as well as risk of downward revisions to the prior two months.  The May Core PCE Deflator is seen up 0.1% m/m, in line with the low CPI.  The y/y should stay at 2.5%.  For the Core PCE Deflator to end the year at the the Fed's lower-bound 2.9% Central Tendency Forecast, it has to average a bit more than 0.2% m/m for the rest of the year (including May's).

The latest Unemployment Claims data support other evidence pointing to slower economic growth after the post-winter bounce in April.  Both Initial and Continuing Claims are above their respective May average in the last week or two.  If they stay at these levels, they would point to a smaller increase in Nonfarm Payrolls in June than the +139k m/m in May.  

The Fed's cautious outlook for inflation reflects their fear that tariffs will boost inflation in coming months.  In this week's Congressional testimony, Fed Chair Powell will likely repeat the points he made at his post-FOMC news conference last week.  He said the Fed expects a large amount of the tariff impact will show up in the next few months' inflation data, but it is hard to predict how the tariffs will work through the various parties -- importers, exporters, retailers, consumers, etc.  They may not be fully passed through.  So, the Fed is waiting to see what the net outcome will be.  

Powell should say that economic growth may be slowing.  Real GDP Growth in H125 so far looks to be 1.6% (saar), taking account of the latest Atlanta Fed Model's 3.4% for for Q225 and the actual -0.2% in Q125.  The H1 pace is slightly above the Fed's 1.2-1.5% Central Tendency Forecast for the year -- revised down from the 1.5-1.9% March Forecast because the magnitude of the threatened tariffs now is higher than what it was when the March forecasts were made.  It suggests the Fed sees a H2 slowdown from the H1 pace.  

Although Powell may face criticism from some in Congress (similar to Trump's) about refraining from easing in the face of expected slower economic growth, the Fed's reluctance is consistent with the optimal policy I described in my April 6 blog.  Aiming for slow growth while tariffs are implemented would help prevent a wage-price spiral from developing.  Without wages trying to catch up to tariffs, the latter would just have a one-off impact on prices.  The wage data in the June Employment Report could be important in the Fed's deliberations.

 

 

 

A Friendly FOMC?

The stock market may resume its rally this week, as the Israeli-Iran attack may move to the background at least for now and the Fed becomes center of attention.  There is a possibility the Fed may begin to tilt toward an easing at this week's FOMC Meeting.  This could be seen in the Statement as well as in Fed Chair Powell's post-FOMC news conference.  

The FOMC Statement might tone down its description of inflation, given the low CPI prints of the past two months.  In May, the Statement said, "Inflation remains somewhat elevated."  Perhaps this remains true for the Core PCE Deflator on a y/y basis, but not the Total PCE Deflator (see below).  The Statement also might modify its description of the balance of risks.  In May, it said it "judges the risks of higher unemployment and higher inflation have risen."  Tariff-related risks to both remain, but the evidence is building towards the former rather than the latter

The Fed is in a delicate situation with regard to monetary policy.  The latest evidence of slowing inflation and possibly slowing economic growth opens the door for rate cuts at some point.  However, a Fed shift in that direction risks the impression of bowing to political pressure from Trump.  To be sure, even a hint that the next move will be an easing could elicit a complaint from Trump that the Fed is dragging its heels.  And, it is likely that any hint would probably be balanced by tariff-related uncertainty.  Still, any hint of easing would be a market positive.

The US economy appears to be evolving along the lines of, if not better than, the Fed's Central Tendency Projections made in March (see table below), which embody expectations of 1-2 rate cuts in H225.  Real GDP Growth in H125 is 1.8%, assuming the Atlanta Fed Model's latest projection of 3.8% for Q225 (after -0.2% in Q125).  The 1.8% H125 average pace, which smooths out weather and other temporary effects, matches the Fed's estimate of the longer-run trend in Real GDP.  Meanwhile, inflation is behaving better than expected by the Fed.  April's y/y is 2.1% for the PCE Deflator and 2.5% for Core -- both below the Central Tendency Forecasts.  Powell may bite the bullet and recognize the desired behavior of the US economy and what it implies for monetary policy.  

                                      Fed's Central Tendency Projections for 2025 (Q4/Q4 % Change) 

 Real GDP Growth                  1.5-1.9      

PCE Deflator                           2.6-2.9  

Core PCE Deflator                  2.7-3.0 

Evidence pointing to a slowdown in economic growth from the Q225 pace is building.  Initial and Continuing Unemployment Insurance Claims have climbed over the past three weeks.  The latest week's Claims data are above their respective May averages.  This week's US economic data could add to this evidence.  In particular, consensus looks for a slight 0.1% m/m increase in May Ex Auto Retail Sales, the same as in April.  Not too much should be made of a soft print, since it could be attributed to the typical pause after a strong month (March).  Nevertheless,  it would keep open the door for slower growth ahead.  In contrast, a large gain could bolster expectations of a sustained strong pace of economic activity. 

  

 

Inflation Next, Growth and Federal Deficit in Background

The stock market may continue to rally this week, as US inflation data are expected to remain contained despite the beginning impact of tariffs and a post-winter rebound in economic activity.  Controversy over Trump's tax bill should bubble in the background, with a self-imposed passage deadline of July 4.

Consensus expects a moderate May CPI, with Total up 0.2% m/m and Core up 0.3%.  This month's report should begin to pick up the pass-through of Trump's tariffs to prices.  However, other forces are at work, as well, including subdued oil prices, compositional shifts in demand for goods and services, and contained wage inflation.  In particular, all three factors and seasonal factors could depress airfares again, as they did in the prior two months.   Also, housing rents may be finally reflecting the softness seen in private surveys months ago.  So, a lower-than-consensus May CPI can't be ruled out.

The May Employment Report confirmed a post-winter rebound in economic activity in Q225 but left open the door for slower growth in Q325.  Total Hours Worked (THW) in May stood 2.4% (annualized) above the Q125 average, markedly better than the +0.7% (q/q, saar) pace in Q125.  This is consistent with the Atlanta Fed Model's latest estimate of +3.8% (q/q, saar) Real GDP Growth in Q225, assuming a boost from productivity.  However, THW in May were only 0.2% (annualized) above the April-May average.  Unless there is a bounce in at least one of the next few months, THW could slow sharply in Q325.  The still-high level of Unemployment Claims for the second week in a row supports this possibility.

The Employment Report also showed that wage inflation remained in its recent range.  Although Average Hourly Earnings ticked up to 0.4% in May, this followed a low 0.2% in April.  The April-May average is 0.3%, equal to the recent trend.  And, the uptick in the unrounded Unemployment Rate to 4.24% from 4.19% suggests upward pressure on wages remains modest.  The question ahead is whether tariff-related boosts to prices lead to a ratcheting up in wage demands as labor tries to recoup its purchasing power.

There are two aspects of the Federal Deficit debate that are relevant for the markets.  One is the sequential change in the Deficit.  The other is the longer-run sustainability of US debt, that is whether investors -- domestic and foreign -- will want to hold the debt around the current level of interest rates.   

A sequential decline in the Federal Deficit would hurt US economic growth.  There would be a substantial drag if the 2017 tax cuts are not extended.  Cuts in Federal subsidies and transfer payments would hurt growth, as well.  An extension of the tax cuts would have little impact on growth, as there would be no increase in fiscal thrust.

The longer-run sustainability of the Federal Deficit has been an issue forever.  So far, the US economy has not collapsed as a result.  Continuing Federal Deficits have been possible because the US dollar is the most important global currency and foreigners need it, either for transactional or storage purposes.  

Investors have been willing to hold US debt and other assets, in part because of a reliable legal system, respect for property rights, and a government constrained by checks and balances in the US.  If investors lose faith in US institutions or policies, then the huge amount of outstanding debt will be a problem.  The sale of US assets -- stocks, bonds and currency -- would push the US economy into recession.  It's not clear the Fed would be able to withstand it if the magnitude of selling is large.  So, while cutting the Federal Deficit would likely be viewed positively by the markets,  if it is not, doomsday prognoses are probably overdone as long as US institutions remain highly respected.  The Fed's independence is one such institution that needs to be maintained.

 

 

   

 

 

  

The Economic Picture In The Background

The stock market is likely to continue being pushed around by positive and negative developments in the tariff war.  Nevertheless, the market still has its eye on the economy in the background, looking for evidence that the tariffs, either themselves or uncertainty surrounding them, damage growth prospects.  This week's key US economic data are not expected to provide such evidence,  Both the May Employment Report and Mfg ISM are seen indicative of moderate economic growth.  So, the macro background is still supportive of stocks.

Consensus looks for a slowdown in Nonfarm Payrolls to +130k m/m in May from +177k in April.  The expected May pace would be consistent with a steady 4.2% Unemployment Rate, which is the consensus estimate.  Such a level of unemployment is historically low but shows some slack relative to last year.  And, as Fed Chair Powell has said, there is little evidence that wage gains have generated inflationary pressures.  That is, a wage-price spiral is not evident.  The consensus estimate of +0.3% m/m for Average Hourly Earnings is consistent with the Fed's 2% inflation target, taking account of trend productivity growth.  The y/y would fall to 3.7% from 3.8% if consensus prints.

The Claims data support the idea of a slowdown in May Payrolls.  Both Initial and Continuing have trended above their levels in the April Payroll Survey Week, suggesting a pickup in layoffs and softening in hiring.  Both jumped in the latest week, but more weeks at the higher levels are needed to confirm their  import.

The consensus estimate of a steady 48.7 for the May Mfg ISM would be consistent with sluggish but non-recessionary growth in the manufacturing sector.  It would remain below the 50.1 Q125 average.  This sector is particularly vulnerable to the tariff war, impacted by higher input costs and potential loss of export markets.  To be sure, the weaker dollar could have helped some industries,

The Atlanta Fed Model's latest projection of Q125 Real GDP Growth is a strong 3.3% (q/q, saar).  The strength largely reflects the drop in April Imports.  This is a mirror image of what happened in Q125, when a surge in imports pulled down Real GDP to -0.2%.  Both figures likely reflect measurement problems when there are large swings in imports.  The best way to evaluate recent GDP Growth is to average the two quarters.  Using the latest Atlanta Fed Model estimate, Real GDP Growth in H125 is about 1.5%.  This is close to the longer-run trend estimated by the Fed and is not an inflationary pace.   

A Tariff Threat and House Bill -- Market Problems?

The stock market may brush aside Trump's apparently "shoot from the hip" tariff announcements after he postponed his latest tariff threat to the EU.   His initial threats appear to be for shock value, to be restrained by his advisors afterwards.  They seem to have a "transactional" goal in mind.  Whether his new July 9th deadline results in a deal or not, it is far enough away for the issue to move to the back burner for the market for now. 

Meanwhile, the House tax bill appears to be fairly neutral for the economy and stock market.  Most of the provisions just make permanent tax provisions that have been in place since 2017.  So, there is little net fiscal thrust from them.  Instead, the cuts to some entitlement programs are a drag on aggregate demand.  And, new spending projects, like "Golden Dome," run into the same problem as Trump's desire to re-shoring manufacturing production from abroad -- other spending would be "crowed out" while the economy is operating near full capacity.   This would be accomplished through higher inflation and Treasury yields, stronger dollar, and/or lower stocks.  In any case, it is still a work in progress, with the Senate expected to make some changes to it.

The possibility of inflationary pressures from Trump's initiatives is a potential negative for stocks, kept in play by longer-term Treasury yields staying high.  To be sure, there could be relief if it turns out that re-shoring or building a defensive system takes a long time to build, so the pressure on resources does not show up quickly.   

There could be relief this week as consensus expects soft prints for this week's US economic data.  Consensus sees flat April Durable Goods Orders Excluding Transportation, after -0.4% m/m in March.  Uncertainty about Trump's tariffs could continue to weigh on them for a few more months.  April Personal Spending is expected to slow to  +0.2% m/m from +0.7% in March -- a pause from a strong post-winter bounce.  And, the April Core PCE Deflator is seen at a low 0.1% m/m, in line with the June CPI.  Boosts from tariffs are likely to begin to be seen in the May CPI, due in June.

 

Focus on Federal Deficit, But Stronger US Economic Growth Ahead?

The stock market may focus on Congressional efforts to forge a budget, now that Moody's downgraded the US because of the unchecked outlook for the federal deficit.  With the House Budget Committee failing to agree on a budget last week, the question is whether or how will taxes be raised or federal spending cut.  Trump presumably will weigh in on the deliberations.  From the stock market perspective, the best outcome would likely be skewed toward spending cuts and a reduction in the 10-year projection of the federal deficit.  Indeed, the Moody's downgrade could be viewed a market positive for putting pressure on Congress to cut the deficit.  Nevertheless, budget-related flareups in the stock market never last.  So, a pullback is probably a buying opportunity.

Once the budget issue is resolved,  stocks may be supported by expectations of stronger economic growth ahead.  Increased business investment and net exports, along with a shift away from imports to domestic production, may turn the consensus outlook away from recession.  In such a turn-about the market may begin to consider a tightening as the next Fed policy move.  Whatever the Fed's next move, it will not likely be an imminent risk until late this year if at all.  

The fear of recession stemming out of Trump's tariffs has abated since he pulled back on the bulk of Chinese tariffs.  There will be less of a tax on consumers than what was feared.  Moreover, the re-shoring of production by companies and the planned investments in plant and equipment to do so will boost economic activity ahead.  And, US exports will be helped by Trump's deals with other countries, such as the 210 Boeing plane order by Qatar, as well as by the recently softer dollar in the FX market.

These boosts to economic activity may not fully boost GDP.   They could "crowd out" other sources of demand, if, as is case now, the US economy is operating close to full capacity.  Higher longer-term yields would weigh on housing and other interest-sensitive spending.  Higher inflation would hurt the consumer.

One US economic data release that could become important to watch is Durable Goods Orders.  (April Durable Goods Orders will be released May 27.)   They contain information regarding capital spending.  It may take several months before they show a pickup in the latter, since the uncertainty and recession fears stemming from Trump's initial tariff announcements likely had businesses pull back in a wait and see posture.   A leading indicator of capital spending in the Philadelphia Fed Manufacturing Survey points to a softening in capital spending into the summer before a rebound.

Construction Spending, typically not given much attention by the markets, will contain information on factory and warehouse building.  These could be a catalyst for growth, as well. 

Another important economic data release will be the Trade Deficit.  A positive for the US economic outlook would be a speedup in exports and a slowdown in imports.  This will be difficult to judge, since both exports and imports surged in Q125 in anticipation of tariffs here and abroad.  In 2024, exports rose 2.4% while imports rose 12.2%.  In Q125, exports rose 4.6% and imports rose 14.9%.  There could be a pullback in both toward longer-term trends in the next quarter or two.

A move toward closing the door on foreign competition, which is what tariffs do, could have an indirect effect on inflation.  By shielding US workers from having to compete with lower-paid foreign workers, US labor may increase their wage demands.  Fed officials, including Powell, have attributed the benign wage inflation despite lower unemployment to the Fed's success in holding down longer-term inflation expectations.  However, it also could have been a result of competition from low-cost labor abroad.  And, if the latter eases up, wage inflation may pick up.

 

 

 

 

 

 

 

 

Tempered Tariffs?

The stock market may continue to be buoyed this week by talk or reports of more trade deals and a cut in Chinese tariffs.  They suggest the bite from tariffs may be less than the worst feared.  To be sure, this weekend's US/China negotiations need to have gone well.  The slew of US economic data this week may be taken in stride, as they could be too early to show the tariffs' impacts.  

The UK trade agreement and Trump's expected backtracking of Chinese tariffs still leave tariffs in place, with their threat of higher US inflation and slower economic growth.  However, both should temper the extreme concerns expressed by some regarding the fall-out from the tariffs.  Indeed, Fed Chair Powell said in his post-FOMC news conference that tariff negotiations could result in a smaller-than-expected boost to inflation.  If the fall-out turns out to be modest, it would probably be seen by late summer or fall.  By then, the fall-out would likely have to be pitted against the federal spending and tax cuts now being considered in Congress.  If the bulk of the tax cuts just extend current law, their impact on the economy could be modest, as well.  In this case, the Fed may not have a compelling economic reason to change policy.

Most of this week's US economic data are for the month of April, when some of the tariffs may have just begun to hit.  The consensus estimates for the April CPI appear to reflect this possibility, as both Total and Core are seen rising 0.3% m/m after the low March prints (-0.1% Total and +0.1% Core).  There is a risk, however, that consensus is too high, as some of the reasons for the low March prints may recur in April, particularly the decline in Airfares. Although the Manheim Survey shows a jump in Used Car Prices in April, these are at the wholesale level and tend to be seen in retail prices with a lag.  

Consensus looks for modest economic growth-related data -- April Retail Sales, Industrial Production and Housing Starts/Permits.  A slowdown could reflect drags from the tariff threat, but not necessarily.  Retail Sales are expected to slow to +0.1% m/m Total (versus +1.5% in March) and +0.3% Ex Auto (versus +0.6% in March).  This could be the typical easing after strong prior gains, so should not be viewed with concern.  A stronger-than-consensus print can't be ruled out, nonetheless, as anticipatory buying ahead of the tariffs could have extended into this month.  Industrial Production is expected to edge up 0.1% m/m after +0.3% in March.  The risk is for a decline, based on Total Hours Worked in Manufacturing last month.   Consensus also looks for little change in April Housing Starts/Permits, which, in the 1.3-1.45 range, have been well below the 1.6 Mn Unit level needed to supply long-term demand.

Unemployment Claims data remain important to watch.  The latest data show an unwinding back to trend of the prior week's jumps in Initial and Continuing (suggesting the latter resulted from a technical factor).  Powell mentioned that the Claims data remain low, indicative of a strong labor market.  Powell also downplayed the -0.3% (q.q, saar) dip in Q125 Real GDP, blaming it on the difficulty of capturing the large swing in imports.  An unwinding of the import surge could result in a bounce in GDP in Q225 or Q325.  The Atlanta Fed Model latest estimate of Q225 Real GDP Growth is +2.3%.

 

 

 

Stock Rally To Continue?

The stock market may continue to rally this week, as resolution of the tariff issue appears to be moving ahead.  The market is likely to become more focused on the fall-out from the tariffs.  There are two questions:  /1/ What is the direct boost to inflation and hit to economic activity? /2/ Will the direct hits develop into a wage-price spiral and/or recession.  It will take time to answer them.  So, the questions should be more in the background for awhile.

The direct hit to prices from tariffs begin mostly in May.  While there should be a lot of anecdotal evidence regarding their impact on prices, the May CPI will be released in June.  Meanwhile, the April CPI, due May 13,  risks being benign, held down by the pass-through of lower oil prices and anticipatory price cutting by motor vehicle companies.  The April Employment Report shows that wage inflation remains subdued, which should help hold down the CPI, as well.

The April Employment Report also suggests that economic activity was set to bounce back in Q225 ahead of the tariffs.  The +177k m/m increase in Nonfarm Payrolls exceeded the +164k 2024 average.  Total Hours Worked in April were 2.0% (annualized) above the Q125 average, a speedup from +0.8% (q/q saar, revised up from 0.5%) in Q125.  The jump in Initial and Continuing Claims in the last week of April, however, raised the risk that the bounce-back will be short lived.  To be sure, it is somewhat suspicious that both Initial and Continuing jumped in the week.  Continuing tends to lag Initial.  Some technical factor may have been behind both jumps.  So, their higher levels have to confirmed in this week's release.

The -0.3% dip in Q125 Real GDP also looks suspicious, since most of the weakness was in a surge in imports ahead of the tariffs.  It would seem reasonable that most of the surge should have found its way into inventories.  (To be sure, some of the import surge fed into business equipment spending, part of which is calculated directly from net imports.)  While inventories were up a lot, the surveys from which they are measured may not have picked up all of them.  It remains to be seen whether inventory investment gets revised up significantly.  If not, it wouldn't be the first time that sharp changes in Net Exports had questionable impacts on GDP.

So far, the Payroll data do not show a significant number of job cuts in the federal government.  They fell 9k in April and down 26k since January.  One reason is that the 75k workers who are receiving ongoing severance pay are counted as employed.  There should be a large drop in Federal Government Payrolls once their severance pay ends.

 

  

Spring Rally?

The stock market may continue to move up, now that Trump appears to have pulled back from undermining Fed Chair Powell and Treasury Secretary Bessent suggested the trade war with China will de-escalate soon.  Besides keeping an eye on whether these shifts in fact occur, stocks are likely to re-focus on the US economy.  Evidence of moderate or strong growth and low inflation will be positive, as it would suggest the economy could avoid recession after the tariffs hit.

This week's key US economic data should not stand in the way of further stock market gains.  Despite an expected a flattish Q125 Real GDP and modest April Employment Report, the latter's details would point to a speedup in Q225 Real GDP Growth.  And, inflation-related data are expected to be subdued. 

Q125 Real GDP is expected to be soft.  Consensus looks for a slowdown to +0.4% (q/q, saar) from 2.3% in Q424 while the Atlanta Fed Model projects -0.4% (ignoring its -2.5% projection that incorrectly includes the impact of gold imports).  There are several possible reasons for a slowdown:  /1/ Bad weather in January and February whose impact was not fully offset in March, /2/ Lagged drag from the tight level of monetary policy, /3/ cautious behavior of consumers and businesses ahead of Trump's tariffs and government firings, and /4/ drag from the stoppage of illegal immigration.  The first explanation is the one with the most potential to reverse in Q225.    

If Q125 Real GDP surprises on the upside, the market may quickly discount the strength if it stems from a jump in inventory investment.  The latter would be viewed as temporary.  However, the inventory buildup most likely would consist of imports brought into the country ahead of tariffs.  So, any unwinding of inventory investment in Q225 would probably be matched by an unwinding of imports -- with little net impact on GDP.   

The April Employment Report will offer a picture of the economy's strength in early Q225.  If consensus is right, the jobs report should point to a speedup in Q225 Real GDP Growth. 

Payrolls are expected to be on the soft side, however.  Consensus looks for them to climb 130k m/m, after a post-winter bounce of +228k in March.  Payrolls averaged 152k m/m in Q125 and 168k m/m in 2024.  Despite the expected slowdown in job growth, the Unemployment Rate is seen remaining at 4.2% and the Nonfarm Workweek flat at 34.2 Hours.  If consensus prints, and there are no revisions to prior months, Total Hours Worked in April would stand 1.5% (annualized) above the Q125 average.  THW rose 0.5% (q/q, saar) in Q125.  So, THW would point to a speedup in Q225 Real GDP Growth. 

Other key US economic data this week could temper expectations of the magnitude of a speedup, based on consensus estimates.  Consensus looks for a dip in the Mfg ISM to 47.9 in April from 49.0 in March and 50.1 in Q125.  It would be the second consecutive m/m decline, but remain at a non-recessionary level.  Hard data on manufacturing indicated modest growth in March.  

This week's inflation-related data are expected to be subdued.   Consensus sees April Average Hourly Earnings contained at a modest 0.3% m/m.   The Q125 Employment Cost Index (ECI)  is seen rising 0.9% q/q, the same as in Q424.   Both Average Hourly Earnings and the ECI have had a fairly steady pace recently (see table).  The y/y for both is just under 4.0%, consistent with 2.0% price inflation if underlying productivity growth is about 2.0%.  

Consensus looks for a slight  0.1% m/m increase in the March Core PCE Deflator, in line with the low Core CPI print.  Note, however, tariffs on Chinese goods are already hitting consumer prices in the US, according to news reports.  Their impact will presumably be seen in the April and May CPI.

                             (q/q percent change)

                          AHE                        ECI 

Q125                0.9                            na

Q424                1.0                           0.9                                                

Q324                0.9                           0.8    

Q224                1.0                           0.9                     

Q124                1.0                           1.2