Uncertainty is in the air. We have discussed some of the mixed economic signals that we have seen over the past couple of years, and this has not gone away in 2025. One big question relating to the Trump administration’s economic policies is whether the overall tax cut and deregulatory policies will outweigh the scattershot trade policies and tariff increases. For now, it seems that the financial markets have stabilized and found their footing since this spring when new tariff announcements sent markets into a tizzy.
While major market indexes are once again hitting highs, economic data is a mixed bag. Let’s start with the labor market. Revisions to the 12 months of jobs data ending in March came in, and, for the second year in a row, there were large downward revisions suggesting the labor market was not as robust as previously thought. On top of that, this summer has seen another marked slowdown in jobs growth, with the BLS survey showing a net decline in June and the ADP report showing a decline in September (BLS report is delayed for Sept due to the US government shutdown). Net job creation has come down over the course of this year, in particular over the summer. While this has not translated to job cuts, the unemployment rate has ticked up slightly. Companies are currently having to navigate the uncertainties of trade and tariff policies, which is reorienting supply chains and causing disruptions to businesses who cannot quickly adjust. Companies have so far attempted to absorb these costs, but the longer they persist, the more they will have to find a way to pass those on either via less job opportunities or higher prices or lower profitability.
This is at the heart of the Federal Reserve’s angst about how to manage interest rates. The slowdown on the labor front is a clear signal to the Fed that they should lower interest rates. However, inflation readings are still elevated and have not been lowered to the Fed’s target. This provides the argument that rates should not be lowered at this time. In weighing both sides of their dual mandate, the Fed ultimately decided in September that the time was right to begin lowering interest rates. They lowered rates 25 bps in September with another 50 bps of cuts projected by year end. Clearly the Fed has decided that a weak labor market warrants more attention at the moment.
Another reason for the debate at the Fed is that we are also seeing positives in the economy. Growth has rebounded from the 1st quarter negative print, with a solid 3.8% growth in Q2 and a projected 3.8% (per the Atlanta Fed’s GDPNow tracker) for Q3. Inflation has come down and is running closer to 2% in shorter term averages, suggesting that this could continue to moderate after elevated readings over the summer, some of which was anticipated due year ago inflation readings.
Technology and AI is another area of seeming strength. The stock market has been led by technology-related companies. There seems to be an almost daily announcement of new deals for AI companies and data centers, including talk of investment bubbles. The Trump administration has aligned itself with being supportive of these technologies and Congress has passed recent legislation to help support various aspects of the industry as well.
This has also coincided with an increase in government interventions in the private sector. This may be one of the most surprising aspects of the Trump administration. Much of the Trump agenda relates to deregulation and downsizing the role of government. So, it is interesting to see the lines between socialism and capitalism blurred in such a way. This has included interventions with IBM, Nippon-US Steel, Nvidia, FCC and media companies, H-1b visas, TrumpRx, and Lithium Americas, to name a few. In the long run, government involvement in the private sector does not tend to end well as governments tend to make decisions based on politics rather than business realities (see America’s struggles with the EV rollout).
With all of the uncertainty markets are currently facing, we have to really lean on our fundamentals for direction. Stay invested for the long-term, not the current fads of the day!
- Federal Reserve Policy. The Fed lowered its key interest rate benchmark 25 bps to 4.00-4.25%. The Fed has signaled another 50 bps in cuts in 2025. There is a strong debate underway at the Fed on whether to focus more on the slowdown in jobs or the continuance of inflation. The jobs slowdown has taken priority as the Fed began lowering rates.
- Economic Growth – GDP. After a negative Q1 reading, Q2 growth rebounded to 3.8% and is currently projected to be 3.8% in Q3 as well (according to Atlanta Fed GDPNow), showing a reversal and continued strength after the trade induced contraction in Q1.
- Labor Markets. Job growth has slowed further in 2025, in particular over the summer. Jobs data in the 12 months ending in March were revised down by 911,000, which is one of the largest downward revisions on record. Clearly the labor market is struggling to continue job growth.
- Inflation. Inflation readings have climbed this summer. Some of this was expected as the result of lower numbers reported last summer. It is otherwise a reflection of the continued tough battle that the Fed has in bringing inflation down to their target. The good news is shorter term averages show inflation closer to the 2% target. Currently, inflation is running closer to 3% in both the CPI and PCE measures.
- Consumer Sentiment & Spending. Retail sales have been a bright spot this summer. Growth in retail sales has continued with the latest reading in August showing 5.0% growth year-over-year. This is an important area to watch as consumer credit delinquencies have been increasing. Will the consumer be able to maintain their spending going forward?
- Housing & Real Estate. As we’ve previously discussed, the real estate sector has struggled with higher interest rates. If the Fed does continue to lower interest rates, this could provide relief to a large sector of the economy where there is pent-up demand. Many homeowners are unwilling to move because they have very low current interest rates they do not want to give up. Buyers and sellers have also had a hard time matching price expectations in the higher rate environment. A lowering of rates over the coming months could be a much needed tailwind to this sector. We’ve also seen home prices falling in a number of markets which will ultimately help bring the market back towards equilibrium levels.
- Business Investment & Manufacturing. The manufacturing sector continues to be in contraction according to the ISM manufacturing survey after a brief period of expansion earlier this year.
- Regulatory Environment. The OBBBA bill was passed into law maintaining and extending the overall tax code. Business deductions and individual rates were made permanent. Deregulation related to energy and technology continued. EPA moved to abandon its endangerment finding for CO2 emissions. Stablecoin legislation was passed, and the Trump administration outlined its policies supporting the growth of the AI industry and data centers with permitting reforms designed to speed up construction of data centers and the energy footprint they require.
- Global Economy. The war between Russia and Ukraine continues to escalate with Russia flying drones and other aircraft directly into NATO airspace. The war in the middle east seems to be at a pivotal point with Hamas announcing they would agree to cease fire terms. There is still a ways to go here, but it is a hopeful sign that this conflict may be coming to an end. Economies around the world are bracing for slower growth. Central banks are continuing to lower rates to be more accommodative.