Weekly Update 08/01/2025: Fed Holds Rates Steady as US Job Growth Cools Sharply
Domestic Economic News
The US merchandise-trade deficit shrank in June by more than forecast, reflecting a broad decline in imports. The shortfall in goods traded narrowed 10.8% to $86 billion from the prior month, Commerce Department data showed Tuesday. The figure, which isn’t adjusted for inflation, compared with a $98 billion median estimate in a Bloomberg survey of economists. Imports fell 4.2% to $264.2 billion. US exports of merchandise decreased 0.6%. Distortions in trade that pushed down GDP at the start of the year were poised to largely reverse in the most recent quarter. A massive increase in imports by US companies trying to get ahead of President Donald Trump’s tariffs caused net exports to subtract 4.61 percentage points from the GDP calculation in the January-March period.
US consumer confidence increased in July as concerns eased about the outlook for the broader economy and the labor market. The Conference Board’s gauge of confidence rose 2 points to 97.2, data released Tuesday showed. The median estimate in a Bloomberg survey of economists called for a reading of 96. A measure of expectations for the next six months climbed this month to 74.4, the highest since February, while a gauge of present conditions fell to 131.5. Consumer concerns about the broader US economy eased after President Donald Trump signed his budget megabill into law early this month that made 2017 tax cuts permanent and incentivized business investment. Even with the advance, the gauge remains below pre-pandemic levels as higher import duties risk keeping inflation elevated while the job market cools.
Home-price growth in the US decelerated in May for the fourth consecutive month. A national gauge of prices rose 2.3% from a year earlier, according to data from S&P CoreLogic Case-Shiller. That was the smallest increase since July 2023 and comes after a 2.7% annual increase in April. “May’s data continued the year’s slow unwind of price momentum,” said Nicholas Godec, head of fixed income tradables and commodities at S&P Dow Jones Indices. Potential buyers have stayed on the sidelines as a combination of elevated prices and high mortgage rates have fueled affordability challenges across the US. The housing market just posted its slowest spring selling season in more than a decade, and sales of previously owned homes fell to a nine-month low in June.
US job openings fell in June after jumping in each of the prior two months, hovering at a level that indicates generally stable demand for workers. Available positions decreased to 7.44 million from a revised 7.71 million reading in May, according to Bureau of Labor Statistics data published Tuesday. The median estimate in a Bloomberg survey of economists called for 7.5 million openings. The pullback in openings was broad, driven by accommodation and food services, health care as well as finance and insurance. Tuesday’s report supports characterizations of a cooling labor market, but only gradually. Job openings remain above average levels seen prior to the pandemic, suggesting there is still a relatively healthy demand for workers. However, hiring has slowed and it is taking unemployed people longer to secure a new position.
US economic growth moderated through the first half of the year as consumers tempered their spending after a late-2024 splurge and companies adjusted to frequently shifting trade policy. Inflation-adjusted gross domestic product, which measures the value of goods and services produced in the US, increased an annualized 3% in the second quarter, according to preliminary government data out Wednesday. As solid as the pace was, economic growth averaged 1.25% in the first half, a percentage point cooler than the pace for 2024. Beyond the recent tariff-related swings in trade and inventories, second-quarter economic activity slowed. Consumer spending — which accounts for two-thirds of GDP — advanced 1.4%. While an improvement from the sluggish 0.5% gain at the start of the year, it marked the tamest growth in consecutive quarters since the pandemic. Business investment expanded at a much slower pace in the April-June period. Because swings in trade and inventories have distorted overall GDP this year, economists are paying closer attention to final sales to private domestic purchasers, a narrower metric of demand. This measure rose at a 1.2% pace in the second quarter, the slowest since the end of 2022.
The Federal Reserve’s preferred measure of underlying inflation increased in June at one of the fastest paces this year while consumer spending barely rose, underscoring the dueling forces dividing policymakers over the path of interest rates. The so-called core personal consumption expenditures price index, which excludes food and energy items, rose 0.3% from May, according to Bureau of Economic Analysis data out Thursday. It advanced 2.8% on an annual basis, a pickup from June 2024 that underscores limited progress on taming inflation in the past year. The data also showed inflation-adjusted consumer spending edged up last month after declining in May. The data illustrate the tug and pull in the economy that has Fed officials split over the course of monetary policy. On the one hand, progress on inflation has essentially stalled and central bankers fear that President Donald Trump’s tariffs — some of which are already being passed on to consumers — will exert greater pressure on prices. On the other, a retrenchment in consumer spending due to a softening labor market risks a broader slowdown in the economy.
US job growth cooled sharply over the past three months and the unemployment rate rose, showing the labor market is shifting into a lower gear amid widespread economic uncertainty. Payrolls increased 73,000 in July after the prior two months were revised down by nearly 260,000, according to a Bureau of Labor Statistics report out Friday. The unemployment rate rose to 4.2% compared to the prior month’s 4.1% level. In the last three months, employment growth has averaged a paltry 35,000 — the worst since the pandemic. The data send a stronger signal that the labor market is weakening more notably. Not only is job growth cooling markedly and unemployment rising, it’s harder for unemployed Americans to get a job and wage gains have largely stalled. That poses further risks to a slowdown in consumer and business spending that’s already underway. The report caps a week of high-profile data that show underlying economic momentum is cooling and inflation progress is stagnating, reasons why the Federal Reserve chose to keep interest rates unchanged again in a divided decision. Chair Jerome Powell maintained that the labor market is solid and the central bank needs to be wary of inflation risks — especially with President Donald Trump’s latest round of tariffs.
US factory activity contracted in July at the fastest pace in nine months, dragged down by a faster decline in employment as orders continued to shrink. The Institute for Supply Management’s manufacturing index decreased 1 point last month to 48, according to data released Friday. The gauge has been below 50, which indicates contraction, for five straight months. A measure of factory employment slid to the lowest level in more than five years, suggesting producers are stepping up efforts to control costs amid higher tariffs and softer demand. Government figures this week showed sluggish consumer spending and business investment in the first half of the year. Government data this morning showed factory employment declined in July for a third straight month, the longest stretch in two years. Average growth of total payrolls over the past three months was the smallest since the pandemic, according to the monthly jobs report.
On a more positive note, US consumer sentiment rose to a five-month high in July on optimism about current conditions tied to a stock-market rally, while inflation expectations eased. The final July sentiment index rose one point from the prior month to 61.7, according to the University of Michigan. The preliminary reading was 61.8. Consumers expect prices to rise at an annual rate of 3.4% over the next five to 10 years, the tamest since January, data released Friday showed. They saw costs rising at an annual rate of 4.5% over the coming year, down from 5% in June. The survey concluded on July 28, a period that covered President Donald Trump reaching tariff agreements with major partners such as Japan and the European Union. At the same time, the president announced late Thursday a heavy salvo of new import duties that boosted the average US tariff rate.
Interest Rate Insight and the Fed
Federal Reserve Chair Jerome Powell said interest rates are in the right place to manage continued uncertainty around tariffs and inflation, tempering expectations for a rate cut in September. “There are many, many uncertainties left to resolve,” Powell told reporters Wednesday following the central bank’s decision to once again keep rates unchanged. “It doesn’t feel like we are very close to the end of that process.” The Federal Open Market Committee voted 9-2 to hold its benchmark federal funds rate in a range of 4.25%-4.5%, as they have at each of their meetings this year. Governors Christopher Waller and Michelle Bowman voted against the decision in favor of a quarter-point cut. Traders pared back their expectations for rate cuts as Powell spoke. Interest-rate futures indicated roughly even odds on a reduction at the next meeting in September, down from about 60% earlier in the day. Treasuries extended losses, the dollar surged to the highest since May and the S&P 500 fell. In their post-meeting statement, officials downgraded their view of the US economy, saying “recent indicators suggest that growth of economic activity moderated in the first half of the year.” The Fed had previously characterized growth as expanding “at a solid pace.” Powell said that moderation “largely reflects a slowdown in consumer spending.” But, when asked to expand on that, he said it had been long expected and consumers were still in “solid shape.” He also acknowledged but played down risks to employment, pushing back against concerns raised recently by Waller that the labor market was showing signs of deterioration. “It seems to me, and to almost the whole committee, that the economy is not performing as though a restrictive policy is holding it back inappropriately,” Powell said. Most policymakers have argued the Fed should hold off on rate cuts to gauge the impact of tariffs on inflation. Several have also emphasized that a strong labor market has allowed them to remain patient.
Impactful International News
Wall Street kicked off a pivotal week with the dollar climbing against most major currencies after President Donald Trump reached a tariff deal with the European Union and signs mounted that the US and China will extend their trade truce. European capitals defended the trade deal struck with President Donald Trump, which will see the European Union accept a 15% tariff on most of its exports to the US while reducing levies on some American products to zero. European Commission President Ursula von der Leyen, who met with Trump in his golf club in Turnberry, Scotland, last Sunday, hailed the agreement for the stability and predictability it will offer businesses and consumers. The EU knew that the deal would favor the US, but von der Leyen urged reporters to “not forget where we came from,” referencing tariff rates Trump threatened that were as high as 50%. The lower rate came as a relief to member states that are dependent on exports, especially Germany, which exported $34.9 billion of new cars and auto parts to the US in 2024. “The agreement has succeeded in averting a trade conflict that would have hit the export-oriented German economy hard,” German Chancellor Friedrich Merz said in a statement late Sunday. “This has enabled us to safeguard our core interests, even if I would have liked to have seen further easing in transatlantic trade.” Without a deal, Bloomberg Economics estimated that the total US average effective tariff rate would rise to nearly 18% on Aug. 1 from 13.5% under current policies. The new deal brings that number down to 16%. Prior to Trump’s latest trade fight, the EU estimated the average tariff rate to be about 1% on both sides. The pact removes a major risk for markets and the global economy, given the transatlantic partners did €1.7 trillion ($2 trillion) worth of cross-border commerce in 2024.
US and Chinese officials kicked off two days of talks Monday aimed at extending their tariff truce beyond a mid-August deadline and hashing out ways to maintain trade ties while safeguarding economic security. Chinese Vice Premier He Lifeng and US Treasury Secretary Scott Bessent led the delegations through Tuesday in Stockholm — their third meeting in less than three months. The agenda includes discussions about how long the current tariff truce can be extended, as well as US levies tied to fentanyl trafficking, and Chinese purchases of sanctioned Russian and Iranian oil. The meeting began a day after the agreement with the European Union was reached ahead of an Aug. 1 deadline to conclude deals with dozens of countries. Talks with Beijing are on a different track with rates for China well above those for other major economies. “We come into these meetings frankly with a strong hand, having made deals with the EU, Japan and many others,” US Trade Representative Jamieson Greer said in an interview Monday with MSNBC, before arriving with Bessent at the venue. “The fact that we are regularly meeting with them to address these issues, I think that gives us a good footing for these negotiations.”
Canada’s economy appears to have eked out weak growth in the second quarter and is on track to beat economist and central bank estimates, suggesting forecasts of severe damage from the trade war may be exaggerated. Advance data showed industry-based gross domestic product rose 0.1% in June, Statistics Canada said Thursday. That comes after back-to-back 0.1% monthly declines in both April and May, and puts quarterly output on track to expand at an annualized pace of 0.1%. That’s a much better economic picture than most were expecting. On Wednesday, the Bank of Canada forecast a 1.5 contraction in the second quarter — economists in a Bloomberg survey were expecting a 0.5% decline between April and June. “Today’s data confirms our view that the Canadian economy is no longer deteriorating,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. “With the effective tariff rate lower than initially feared and some reduction in uncertainty, both business and consumer confidences have improved, leading to some increased spending.”
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