Hello, my friends!
Well, it was yet another “week that was” in the U.S. economy, with all kinds of developments and data…including unwelcome jobs numbers and renewed tariff distress…energizing the news cycle and sending markets reeling.
By the time Friday’s trading session ended, each of the three major averages had lost significant ground on the week. The Dow Jones Industrial Average suffered the biggest drop, tumbling 2.9% to finish at 43,588.58…more than 1,200 points lower than where it was at Monday’s open. The broader S&P 500 and tech-heavy Nasdaq Composite fell nearly as hard, ending the week down 2.4% and 2.2%, respectively.
The indexes suffered much of their damage on Friday in the wake of a much-worse-than-expected July jobs report. The Labor Department not only revealed that job growth last month fell far short of consensus expectations…but also announced significant downward revisions to the jobs numbers from May and June. I’ll be discussing the employment data in greater detail shortly.
Putting additional downward pressure on markets this week was the White House’s updated reciprocal tariff regime, now set to go into effect August 7. The revised duties range from 10% to 41% and are poised to be levied against nearly 70 countries.
This, in fact, turned out to be one of the busiest weeks for the economy in quite a while. Let’s take a look beyond the headlines at just some of what made it so hectic.
Fed Policy Meeting Sees Its First Multiple Dissenting Votes in Decades
One of the week’s biggest economic headlines was generated by the Federal Reserve’s fifth policymaking meeting of the year…but it wasn’t the actual decision of the Federal Open Market Committee, which, to no one’s surprise, left interest rates unchanged at the target range of 4.25% to 4.5%.
Instead, it was the casting of “No” votes on that decision by Federal Reserve Governors Michelle Bowman and Christopher Waller, making it the first time in more than 30 years that multiple dissenting votes were cast against a rate decision. Both Bowman and Waller have said they think inflation is sufficiently under control but that the labor market is in peril, and the pair believes the time has come for the central bank to resume easing.
They were, of course, outnumbered 9-2 by the other members of the FOMC, who…as of this past Wednesday…were more concerned about the impacts that tariff-induced inflation could have on prices than they were about any looming weakness in the economy.
“Our obligation is to keep longer term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem,” Fed Chair Jerome Powell said in the post-meeting press conference.
Powell’s noncommittal stance on the subject of rate cuts in the near term prompted traders to lower their expectations of a reduction in September from 64% to 46%. But two days later, those odds soared again with the release of the government’s nonfarm payrolls report for July, the contents of which seemed to validate the very concerns of dissenting Fed officials Bowman and Waller.
Job Growth Sinks in July…and, as It Turns Out, Positively Tanked in May and June
As I noted earlier, the government’s nonfarm payrolls report for July proved to be an especially large – and especially unpleasant – catalyst of market activity this week.
The primary headline, that the economy added a measly 73,000 jobs in July and the unemployment rate rose to 4.2%, was bad enough. But to make matters (much) worse, the Bureau of Labor Statistics (BLS) revised down the May and June job-growth numbers by a stunning 258,000, total.
According to BLS revisions, just 19,000 jobs – not the previously stated 144,000 – were picked up by the economy in May, while June saw a mere 14,000 jobs added…far below the 147,000 that the government originally said were gained.
Beyond the immediate impact to financial markets, which I discussed earlier, the report suddenly put a September rate cut back in the center of the table, just one day after PCE inflation readings seemed to push it further away.
“This is a gamechanger jobs report,” Heather Long, chief economist at Navy Federal Credit Union, told CNBC. “The labor market is deteriorating quickly.”
Game-changing, indeed. By the weekend, traders had raised the odds of a September rate cut up to 80%.
And that’s not all. Concluding that the wonky jobs data was a sign of either gross ineptitude or politically motivated malfeasance, President Trump took the extraordinary step on Friday to fire BLS Commissioner Erika McEntarfer, who had been appointed to the position in 2023 and confirmed by the Senate in January 2024.
Announcing the dramatic change on Truth Social, President Trump wrote:
“We need accurate Jobs Numbers. I have directed my Team to fire this Biden Political Appointee, IMMEDIATELY. She will be replaced with someone much more competent and qualified.”
Fed’s Favorite Inflation Metric Sped Up Across the Board in June
Sandwiched in between Wednesday’s Fed rate decision and Friday’s jobs report was the release of a key inflation gauge for June that at the TIME seemed to validate Fed Chair Powell’s “wait-and-see” approach to monetary policy.
On Thursday, the Commerce Department reported that the personal consumption expenditures (PCE) price index…known to be the Fed’s preferred inflation measure because it better reflects changes in consumer behavior…accelerated on both monthly and annual bases last month.
According to the data, headline PCE increased 0.3% for the month, up from May’s 0.1% pace. Year over year, PCE in June climbed 2.6%, speeding up from 2.3% in May.
As for core PCE, which strips out more volatile food and energy prices, that also accelerated in June. The monthly rate came in at 0.3%, a tenth of a percentage point faster than in May, while annual core PCE rose 2.8% in June…also a tenth of a point faster than the month before.
In their assessment of the data, economists seem to be largely on Powell’s side in the tug-of-war between the Fed and the White House over what should happen with interest rates as tariff impacts continue to work their way through the economy. Following the release of the PCE numbers for June, Michael Pearce, deputy chief U.S. economist at Oxford Economics, declared, “Tariffs are beginning to make their mark on the inflation data”; and senior economist Sal Guatieri of BMO Capital Markets informed clients, “We will need to see either calmer inflation figures or weaker growth or softer job conditions to spur a rate cut on Sept. 17.”
As we know from our previous discussion of the jobs report which came out on Friday, glaring signs of “softer job conditions” now are in evidence. Does that mean September rate cuts are suddenly a done deal? Not necessarily. But if the August nonfarm payrolls report…which comes out September 5…telegraphs still more epic weakness in the labor market, it’s hard to imagine the Fed again will refrain from cutting rates.
Consumer Confidence Ticked Up in July…but Americans Remain Anxious About Tariffs, Job Market
Finally this week, a widely followed gauge of consumer sentiment suggested that Americans recently have grown a little more upbeat in their consideration of the country’s economic outlook…but remain anxious about what lies ahead for the labor market as well as how tariff impacts ultimately might manifest.
On Tuesday, The Conference Board reported that its proprietary Consumer Confidence Index came in at a reading of 97.2 last month, two points higher than the 95.2 posted in June. Despite the improvement, however, the July number represents the fifth consecutive month the index landed below the neutral reading of 100. Measures below 100 imply greater pessimism, overall, among Americans.
The story was largely the same with the Expectations Index, a component measure of the headline metric that evaluates consumers’ six-month outlook for the economy.
In July, the Expectations Index climbed 4.5 points to come in at 74.4. Despite that solid improvement, however, last month’s reading left the subindex below the critical level of 80, which implies that a recession could lie ahead.
In a statement, Stephanie Guichard, senior economist at The Conference Board, addressed two of the more prominent reasons why the metrics remain at less-than-optimal levels.
“Consumers’ write-in responses showed that tariffs remained top of mind and were mostly associated with concerns that they would lead to higher prices,” Guichard said. “In addition, references to high prices and inflation rose in July.”
Guichard also noted, “Their [consumers’] appraisal of current job availability weakened for the seventh consecutive month, reaching its lowest level since March 2021. Notably, 18.9% of consumers indicated that jobs were hard to get in July, up from 14.5% in January.”
That’s it for now; have a marvelous weekend!
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