Chief Economist, KPMG, opinions my own
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A day to remember my dad who grew up near this beach. He loved the sunsets & the rare moments you could see Chicago. He left this earth this day in 2018. I will always miss you & carry your spirit with me. Be kind; pay it forward. Some things can be too short for this world. ❤️
The Fed has sought more flexibility to move as needed, in a more rapidly shifting post-pandemic economy. The uncertainty about the outlook is its own weight on the economy and the Fed as it attempts to keep the economy from recession, while ensuring any inflation we endure is short-lived.
..and less predictable post-pandemic economy. It is one of the reasons the Fed was slow on the uptake in dealing with the post pandemic inflation. We are more than four years away from a sustained period of price stability.
That speaks to the uncertainty about the outlook post pandemic. Powell also laid out the new framework for setting policy. The key is that it is more flexible than the old policy-setting framework, which was essentially dead on arrival post-pandemic and ill-equipped to deal with the volatile..
One of the hawks is a voting member of the FOMC. We still have two major reports on employment & inflation out prior to the next Fed meeting but it is possible we have dissents in both directions at next meeting. Doves looking for half percent cut may dissent if less, hawks could push back.
That is like traversing a high wire without a net. Debate within the Fed has flared and it is not clear a quarter point cut would be enough for those who want a cut. Conversely, there are still hawks who prefer to stand pat to be sure the inflation in the pipeline will be short-lived.
Powell opens door to calibration in rates in September in Jackson Hole Speech. The challenge the Fed faces is to tame inflation, which has moved up again & been above the Fed’s 2% target for more than four years without too much additional weakening in the labor market.
…counterparts. At the time, the labor market scarring of the global financial crises seemed hard to escape. Then, we hit a reset but only for a brief time and now we are even more locked in and locked out than ever before in housing and the labor market.
It temporarily opened opportunities for gen Z and even older workers. Millennial were maligned for their lack of commitment in the 2010s. Oh the rose colored glasses older workers saw themselves in. The churn of millennials in early 2010s was less not more than their older…
We had a massive reset with the frenzied job and housing market emerging from the pandemic and into 2023. It helped get millennials who graduated into the Great Recession into better jobs that were a better match for their skills and paid better.
ultimately, lower productivity growth. When people are not working in the best job for their skills, that is suboptimal for the economy. Food for thought…. Need to dig deeper to look for offsetting trends but the shift is worth watching closely.
for all parents to work and provide the basics of food and shelter for their families. There are other effects that we been to watch for. A drop in the ability to move for a job undermined matching in the labor market. That means less optimal job matches, lower pay & …
It had other benefits. Nick Bloom discovered that remote work and hybrid increases birth rates , not just births, which rose last year m, but birth rates, something the UK is looking into. Costs of care for children and elderly have soared, making it all that more expensive…
…has diminished. The National Association of Realtors survey last year revealed the average age of a first time home buyer is 38 - oldest since records started in 1981. Same time remote work picked up, which for a while seemed to ameliorate the matching problem….
… this way for a while. That not only leaves little margin for error should layoffs rise, it has consequences for productivity growth and matching between workers and jobs. The ability for a worker to move to a better job that is more suited to their skills & pays more…
The same time, churn in the labor market has slowed. The pace of hiring & quits have dropped to levels we haven’t seen since the sub par recovery of the 2010s. They are lower than pre pandemic and at levels more consistent with much higher unemployment rates - 7%. It has been..
Locked in and locked out. This article underscores a major structural shift in the economy I have been thinking about for some time now. We are losing mobility & with those shifts dynamism has dropped. www.wsj.com/economy/amer...
The September meeting will be live but Powell will be reluctant to telegraph a certain cut in September, given all the data on both inflation & employment cut out prior to then. Dissents will persist if they do not cut. We still have two cuts penciled in by year end.
We are due another forecast with the September meeting. Look for more participants to coalesce around two cuts. That average could be pulled down - with more cuts - if the president’s nominee to temporarily replace Gov Adriana Kugler is sworn in by Sept. Fin markets are likely discount that.
They will need to see a further weakening in demand and the labor market to feel comfortable cutting, while inflation is moving up.
That was the stickiest part of the pandemic-induce inflation. We can’t afford a u-turn in it. Financial markets are betting heavily on a September rate cut. The devil in the details on this data is not easy for the Fed.
It takes a 6-18 months for the initial effects of tariffs to work their way through the economy. That coupled with the doubling of the June effective tariff rate in August, suggests the bulks of tariff-induced inflation is still ahead of us. The service sector inflation needs to be watched.
Gains in the service sector showed up in health care, vehicle insurance, postage/shipping, financial services and airfares. This is all prior to tariffs still to be felt in the pipeline - firms announced more increases for August, inc cost of many consumer staples.
The increase from a year ago was 3.7%, the hottest annual pace since February. That compares to 2.2% in 2019. Many hoped that service sector inflation would cool and offset the upward pressure due to tariffs. That is not happening.
Tax credits on those vehicles lapse on October 1, while vehicle producers are taking losses on tariffs paid ~ $12B to date. 👀 The super core services, which strips out shelter and utilities, soared 0.5%, it fastest pace since January.
Durable goods prices increased at their fastest y/y pace since November 2022, after placing a drag on inflation much of last year & the start of this year. That is the wrong direction & in most tariff-sensitive sectors. Includes flat vehicle prices due to rush to on EV sales.
Why does the Fed care so much about the core? It included more things it can affect and it tends to be the best indicator of where momentum is headed, which is up for prices.
Good news. Inflation comes in as expected with more drag from shelter costs. Rents are cooling and hotel room rates continued to plummet in July. The sticking point is the Core CPI, which was up 0.3% but rounded to a 3.1% gain from a year ago. Highest since Feb.
From Wall Street Journal What could go wrong? Heard on the Street: The resilience of individual investors may signal something more than just misplaced optimism as a new generation of “buy the dip” investors is propping up the market
The number of Americans receiving unemployment benefits for at least a week rose to the highest level since late 2021, according to Labor Department data.
Watch PBS Newshour tonight to hear KPMG US chief economist Diane Swonk explain the latest twists and turns in the economic landscape.
Tapped into Ancient Astronomy for this month’s take on the economy. Sirius, the Dog Star, was once beloved to trigger the unbearable heat, lethargy, bad luck and uncertainty…seemed apt metaphor for economy as effects of tariffs start to show.
Listen to KPMG chief economist Diane Swonk explain to the Wall Street Journal why the economy feels OK, but cracks are showing. www.wsj.com/video/series...
It is easier to think about how one might act at the Fed under such a scenario than actually live it. They will likely cut but it will is not as much of a slam dunk, given the risk of much higher inflation as it would otherwise be.
The probabilities of a September rate cut just soared, along with the risk of stagflation - a toxic mix of rising inflation and unemployment. That is what the Fed forecast in June and still had 7 who expected no cuts this year. The pressure on the Fed to cut in Sept is huge.
That is a tough decision, given the tariffs in the pipeline, which could double the effective tariff rate by year end. Uncertainty regarding tariffs remains elevated given the new tariffs announced this week, which is further taxing the economy.
Bottom line Today’s data affirms the dissents by Fed Governors Waller and Bowman at the July meeting. The challenge for the Fed is to cut once it is sure that the weakness in the labor market will make any bump in inflation due to tariffs short-lived.
The ranks of the unemployed swelled in July, along with those having to accept part over full time jobs. The stress measure of unemployment, which includes marginalized workers jumped to 7.9% in July from 7.7% in June. That is higher than 2019 norms & highest level since Feb.
The data is not apples to apples as the breakdown between foreign-born and native-born workers are not seasonally adjusted. Foreign-born workers have fallen by 1.5M since April, the largest losses since the onset of the pandemic in 2020.
Most federal workers are employed outside of the Beltway. The unemployed rate was 4.2%, which underscore how little it takes to hold the unemployment rate steady. The civilian labor force contracted in July, while the participation rate fell for the third consecutive month.
Federal workers are down by 81K since the start of the year. Those losses largely reflect retirement amidst a hiring freeze. More to come on that front as severances lapse in the fall. @AtlantaFed had estimated that spillover effects to local ecosystems could hit 1.2M.
Some sectors are seeing wages approach or dip below levels of inflation again. That erodes purchasing power. The Fed will be looking for consumers to push back against tariff increases to ease up on policy. We still expect the first cut late this year in rates.
Bottom line, compensation held up but not evenly in the second quarter. Gain in wages offset slowdown in benefits - incentive pay played a key role. Productivity growth was weak in the first quarter and could rebound in the second quarter due to swings in GDP.
the second quarter of 2023. Largest losers were in accommodation and food services, which dipped to 2.9% in the second quarter from 3.9% in the first. That is is slowest pace since the first quarter of 2016. Leisure & hospitality feeling a squeeze. Vegas is feeling the pain.
Compensation surged at a 5% pace from a year ago in the second quarter, it hottest pace since the fourth quarter of 2022. Finally, information jumped 3.5% from a year ago in the second quarter, well above the 1.9% pace of the first quarter and the hottest pace since…
…in the first quarter to a 3.8% increase in the second quarter. That is its hottest annual pace since the first quarter of 2024 and is occurring despite a contraction in construction activity. In Finance, the big mover was real rate and rental and leasing.
Some of the biggest winners in the compensation race goods producing indices, which saw an acceleration outside of manufacturing. Construction is the primary driver, again an area heavily dependent on foreign-born labor. Compensation surged from a 2.9% increase in…
Public sector wages missed the initial upturn during the hirng frenzy and are still growing much faster than private sector wages. State and local governments have also been hiring up and the job opening data suggests that demand remained buoyant at the end of June.
..reflect a combination of strong demand due to aging demographics, the push to replace worker who quit during or after the pandemic and a heavy reliance on in foreign born skilled and less skilled labor.
Much of the shift from wages to benefits cooling was due to a rise in bonuses and commission. Finance stood out, buoyed by market volatility early in the quarter. One outlier on the trajectory of compensation gains is healthcare and social assistance, which likely..
The employment cost index rose 0.9% in second quarter, matching the pace of the first quarter. That pushed overall compensation for civilian workers up 3.6% from a year ago, the same as the first quarter. The composition of gains shifted. Wages rebounded but benefits slowed.
Current and proposed tariffs are much larger than anything we saw in 2018-19 when effect tariff rate popped above 3% for a bit before receding. Hard place to be.
..tariff-effects. The Fed hopes that those effects will taper off on inflation. They also deal a blow to profit margins. That could impact employment. The effective on employment outweighed the price effect, even though they were large, in 2018-19.
..leverage of bonded warehouses in Free Trade Zones. The effective rate has been about 9-10% but is moving up and could double by year end given flurry of new tariffs levied. Tariffs take 6-18 months to work their way through the economy. More to come.
..coffee and staples are all susceptible to tariffs. Diapers and baby formulas on that list as well as toys. Worse yet, the effective tariff rate was held down in recent months by stockpiling, reshuffling supply chains, pauses on most prohibitive tariffs & ..
…onto consumers by companies. Some are unavoidable, due to shear size of tariffs. Still unclear how much will stick. There is a gap between what companies want and can do. Brace for another move up in prices, especially at grocery store, as many packaged foods,
Core services inflation has cooled but remains well above the levels we saw in 2019. It is still at 3.2% on a Y/Y basis, despite further cooling in airfares. That is well above the 2% pace of 2019. Powell cited Fed surveys that reveal a desire to pass tariff costs…
Overall 2.6%, up from upwardly revised 2.4% in May. Core PCE up 2.8%, in June and May with upward revisions. Big ticket durable goods - those most susceptible to tariffs rose at fastest Y/Y pace since December 2022.
ummer heatwave Today’s revisions for PCE index changes the narrative on inflation a bit. Upward revisions show more inflation in the second quarter and in June. The increase was driven by a jump in goods inflation.
Growth whipsawed by mother of all front running cycles. Underlying economy weak with inflation. Tough for Fed.
For the Fed, it will keep rates on hold. They will have the implied PCE data as well. That may not change the stance of Governors Waller and Bowman who could dissent but could harden the resolve of the rest of the participants to “wait and see” before signaling a cut in rates.
…liquidate those inventories prior to further increases in tariffs on August 1. We also still have sector tariffs in the pipeline. We expect the effective tariff rate to move from less that 3% at the start of the year to above 20% at end of year.
More tariffs are due out on August 1. The effective tariff rate was held down leveraging bonded warehouses in Free Trade Zones, which enabled firms to delay tariff payments until imports that they stockpiled were needed. There is likely a rush to…
..goods and services, suggesting some contagion due to tariffs. Service inflation went up faster than that for goods, although both were hot.
…in June from 2.3% in May. The core PCE looks like it ended the quarter with a gain of 2.9% in June, an acceleration from 2.7% in May. That is the hottest overall and core annual PCE figures since February 2025 and March 2024, respectively. Worse yet, gains were in…
MORE IMPORTANT… today’s data gave us a preview of tommorow PCE index for June, which the Federal Reserve targets. That suggests that PCE overall and core index may have surged 0.5% in June, prior to revisions. That translates to an overall acceleration in PCE inflation to 2.7%…
… research to schools & individual agencies were suspended by the administration. It is unclear those curbs will hold due to legal challenges.
Business investment fell slightly, with a drop in structures offsetting a modest increase in new equipment. Inventories liquidated and gains in state and local spending offset a drop in federal outlays, notably in discretionary spending. Funding approved by Congress for everything from…
The largest movers were the swing in the trade deficit, which went from boom to bust and inventories, which rose and ebbed with imports. Consumer spending rose a tepid 1.4%, better than the 0.5% of the first quarter but still tepid
Wow. GDP whipsawed by tariff front running. Real GDP rebounded at 3% annualized rate in the second quarter after dropping 0.3% in the second quarter. That puts that average for the first half at 1.3%, less than half the 2.8% we saw in second half 2024.
The Greenspan Fed then raised rates aggressively in 1994, culminating in bond market sell off. Only to realize nearly derailed economy in early 1995, without inflation. Could we be on the brink of a major easing cycle? Possible post Jay Powell - bubbles also appear to be forming in asset prices.
It takes 6 to 18 months per Fed research for all effects of tariffs to show up. The tend to be stagflationary - what is unknown is how long. Majority on Fed want to wait and see and will vote to keep rates unchanged. The Fed has not seen two dissents by Governors since December 1993.
..inflation transitory. Others point to risks of more lingering inflation due to boost in input costs and smoldering embers of pandemic inflation.
The Fed meets this week, with new level of policy purgatory - dissonance within the ranks of Fed. Gov Waller and Bowman have signaled possible dissent due to fears economy is much weaker than appears. Waller expects more of the effects of tariffs to deal blow to employment. He sees bump in …
EU tariff deal provides some sense of an end game on where tariffs will land, albeit short on details. The rise in tariffs by year end still stunning from below 3% at start of year to close to 20% by yearend. Markets have been relieved to see an end point in sight but have yet to price costs.
Bottom line: Tariffs are distorting the global economy but the effects are nonlinear and compound over time. We will not know all of the effects until later this year and into 2026. It took year for the full effects of the 2018 trade war to show up as a blow to manufacturing.
The result is a much smaller initial impact of tariffs and stronger global growth than one would expect. Disinflation abroad has also helped as most major central banks have been cutting rates, the effects of which are compounding.
The cost of carrying inventories is not cheap but it is less expensive in many cases than fronting the funds for tariffs before goods are needed. They enable firms to wait for tariffs to drop, which occurred as many of the most prohibitive of tariffs were paused.
Another factor preserving cash flow is leverage of what are known as bonded warehouses in free trade zones in the US. Goods come in and are registered as imports but tariffs are not collected until those inventories are withdrawn and drained.
We know front running mitigated the initial boost to prices due to tariffs. Much of the goods that we are bought in the second quarter were bought by retailers ahead of tariffs. Some retailers actually dropped prices as they ran those inventories down & shored up cash flow.
…estimates are based on history or imperfect substitutes. Nearly 1/3 of the CPI in recent months has been estimated via these methods, which would be fine if the shifts we were seeing were not so rapid. It is unclear how/if those estimates changed the data.
Now add another issue. The economic data isn’t designed to capture the speed of the shifts we are seeing. A lot of inputs are estimated off of historic trends and then updated upon revision. At the same time, budget cuts are crimping data collection, which which means more…
I don’t know all the places that bubbles are forming but a lot of asset prices look frothy. New asset classes, subprime in 2000s or private debt & crypto in 2020s? AI stocks? Everyone likes to bet on the new thing. Rarely do people actually buy low & sell high - they prefer comfort of a crowd.
High income households, with more savings tend to make riskier investments as they can afford the losses. That makes for fertile ground for asset bubbles. An extreme example was the subprime crisis, which ended with the bursting of the housing bubble and ripple effects.
Same time, strapped low & middle income households tend to take on unsustainable levels of debt, which at times can seem a boom to lenders, until it isn’t and defaults pick up. Delinquencies are still low in wake of pandemic stimulus but rising, even in most affluent zip codes - student loans?
June retail sales rebounded after falling in May. Problem. Inequality has a lot of knock off effects. High income households have their basic needs met. They save and make riskier investments than rest of household.
The rebound in equity prices helped, especially in an economy where Moody’s has estimated that the top 10% of earners accounted for nearly half of consumer spending last year. It looks like spending increase ~ 1.4% rate in 2Q. Not stellar but better than 1Q chill.
Ireland saw a 7% surge in GDP due to a huge jump in pharmaceutical exports to the US - those have gotten a stay & are left with drugs in inventory. Ireland looks poised to contract by 5% in 2Q. Consumers here regained some but not all of their swagger with a stay on worst tariffs.
That roiled markets and imports collapsed. The trade deficit narrowed at its fastest pace on record in April and in May, imports from China dropped to their lowest share of total imports since 2001. That is the year of their ascent into WTO Earlier gains boosted production the world over -
Consumer spending rose a tepid 0.5% annualized rate in 1Q after surging 4% in 4Q. Some of that weakness was due to a late Easter and uneven spring breaks. Unusually cold weather in the South curbed mobility & spending, notably at restaurants. Then came April 2 tariff announcements.
…tariff threats intensified. Imports soared and hit a crescendo in March. Those increase buoyed production across our trading partners. Our trade deficit widened at its fastest pace on record, by nearly double. The consumer became tentative in 1Q.
The mother of all front running cycles. Late last year imports starter to pick up, notably from China. The 2018 continued through the next administration but many firms rightly bet that it would escalate via much higher tariffs w/the president’s return. Gains were turbocharged as…
Inspired by a visit to the Cliffs of Moher.
My take on the structural shifts underway amidst trade tensions.
Listen to this podcast which features macroeconomist Diane Swonk from KPMG discussing Federal Reserve policy with well known Fed journalist Kathleen Hays. kathleenhays.substack.com/p/swonk-sees...
Tariffs as working their way into the inflation data. Brace for more in July. Coffee up double digit rate from a year ago. Eye opening.
Listen to Yahoo Finance now to hear KPMG's Diane Swonk on CPI and the interest rate outlook.
Prolonged periods of stress are difficult and trigger stress, which can cause hesitation, mental and physical health problems. That is why economists watch it and have gone to great lengths to measure its effects.
Periods of heightened uncertainty act as a tax on the economy. The more prolonged the uncertainty, the greater the tax. The effects are often not immediate but effect with a lag and can compound over time. The economy is but the study of collective human behavior.
What could go wrong? 😱 www.wsj.com/finance/stoc...