This Summer’s Economic Crosswinds: What’s Shaping the Markets Now?
This summer, we sent our oldest son off to camp for the first time. The emotions my wife and I experienced were all over the place, to say the least. We were exhilarated to see him take on a new environment and opportunity with enthusiasm, saddened to be without him for four days, and anxious to hear how his first experience away from his family was upon his return. As I write this, he’s on day three of four, and I couldn’t be more excited about having him back home to hear all about it.
As odd as it sounds, the many cross currents flowing through the global economy can be described to be just as erratic as my emotional range after sending my son to camp. There is a lot happening all at once, despite the lack of market turbulence we’ve seen over the past few weeks. Here’s a sampling of the major events we’re focusing on.
Tariffs and Trade Tensions
Trade tensions, particularly between the U.S. and China, continue to be a dominant factor creating uncertainty in the global economy. While there have been temporary truces and adjustments, the underlying effective tariff rates remain historically high. For instance, the U.S. effective tariff rate on trading partners, even after recent reductions, is still significantly elevated compared to previous years.
With that said, economic data continues to weather the tariff storm relatively well. There was a negative GDP number for Q1, but this was almost entirely due to the increase in import activity as businesses attempted to bring in supply ahead of any potential tariff shock. The Atlanta Fed’s GDPNow forecast, which is a real-time indicator for GDP growth, suggests a rebound to 3.8% for Q2 GDP. The next official release will be on June 26, when we can better see how the economy reacted after the official April 2 tariff announcement.
The “One Big Beautiful Bill Act (OBBBA)”
While not receiving as much attention as tariffs, but is arguably significantly more important, the House of Representatives passed the OBBBA on May 22. This bill encompasses an extension of the 2017 Tax Cuts and Jobs Act, cuts to Medicaid and the Affordable Care Act marketplaces, and increased funding for immigration and border security. The Senate is currently making amendments to the OBBBA and will send these amendments back to the House to reconcile their differences before sending the bill to the President. In all likelihood, the bill will be signed by the end of August as the debt ceiling limit is expected to be reached around this time. The bill currently includes a provision to increase the debt ceiling by trillions of dollars, which would effectively remove the threat of a government shutdown for the foreseeable future as a result of surpassing the debt ceiling limit.
The biggest item to keep in mind throughout this entire process is that no matter what is included in the bill or discussed throughout the media today, none of it matters until the final language is drafted and signed into law. We’re still early on in the legislative process to come to any significant conclusions on what the final bill will look like. Until the Senate passes their version, much of what is being discussed publicly is subjective speculation.
Inflation, the Labor Market, and the Fed
The U.S. labor market presents a mixed picture. While the BLS establishment surveys show continued job creation, particularly in sectors like healthcare and food service, the overall pace of job growth may be decelerating. There’s also evidence of a decline in labor force participation and a rise in the number of people not in the labor force, according to household surveys. Despite these nuances, real (inflation-adjusted) wages continue to rise, which helps boost household spending power.
Inflation remains a critical concern. Recent CPI reports indicate that while headline inflation may have eased slightly, core inflation (which removes volatile components like food and energy) remains a focus. Tariffs are expected to provide a renewed, albeit likely transient, impulse to inflation, though recent trade developments might mitigate the severity of this.
The Federal Reserve’s monetary policy will continue to be closely watched. Hopes for aggressive interest rate cuts have faded somewhat as the economy has shown more resilience than anticipated. Current market expectations suggest a more cautious approach, with potentially only one or two quarter-point rate reductions in the latter half of the year. The Fed’s dual mandate of ensuring price stability and supporting maximum sustainable employment will guide their decisions, and they are likely to remain patient, waiting for clear signals on both inflation and labor market conditions.
There’s plenty more we could review, such as the health of the consumer (still resilient), corporate earnings (exceeding expectations), or geopolitical risks (Russia and Israel remain a key focus). The takeaway is that the 30,000-foot view of the U.S. economy remains on a solid foundation. There’s a lot of noise to digest these days, and it’s important to sort through what is and isn’t material to the longer-term health of the economy. We remain optimistic about the near-term outlook and will continue to sift through the noise and plan for the changes that matter.
