In just two week’s time, Jerome Powell and his fellow Federal Reserve officials will convene behind closed doors to decide the fate of the US economy.
Powell will almost certainly choose to err on the side of caution, deciding not to cut interest rates and instead let things simmer for another two months. He’ll cite a strong jobs market and the transitory nature of inflation as his reasons for holding fast.
But I’m almost certain that a) he’s wrong about today’s economy, and b) he might be making a massive mistake.
Click on my video below for the full story:
Video transcript:
I am Andrew Zatlin. Welcome to Moneyball Economics.
In two weeks, the Fed is going to be meeting again to decide whether or not they’ll do a rate cut.
If they don’t do a rate cut, then it’s two months September before the next meeting, at which point they may or may not make a rate cut. So if you’re the market and you think there’s no July rate cut, this is about a three month period of no rate cuts. As a result, yields are starting to creep up because the market is seeing conditions that they think do not support a rate cut.
What the market’s seeing is they think the economy’s looking pretty good, especially the labor market. At the same time, they’re seeing inflation kind of move up a little bit like CPI moved up just a little bit. It may not be a lot, but it’s certainly in the wrong direction, and at the end of the day, they’re trying to put themselves in the shoes of the Fed and they’re saying none of this supports the idea that a rate cut should happen.
I think the markets have it half right and half wrong.
That is, I think they’re correct that inflation is here. In fact, when I dive into the data, inflation’s a lot more problematic. We definitely have tariff induced inflation right now and gathering more and more energy going forward. So inflation’s definitely here and it’s just going to get worse.
However, where I disagree with the market is their diagnosis of what’s going on with the economy. I see nothing but a soggy economy.
This means the Fed’s going to have a problem going forward. They’re either going to say, yep, the market’s right. We do see economic strength and we do see rising inflation, neither of which is changing as far as we can tell, and so we’re not going to cut interest rates or they might say No, Zatlin’s righ. The economy’s kind of soggy, inflation’s kind of hard.
We are now firmly in a stagflationary position.
We don’t know what to do, which means the Fed has to figure out, do nothing, or do they try to support the economy because they think this inflation’s transitory? “Hey, we know Donald is going to make some kind of agreements on the tariffs, and so whatever inflation’s there is going to go away.” Meanwhile, the economy is trending down. Which one’s transitory, which signal is more important to the Fed in order to make a rate cut?
We’re not going to know until September.
In the meantime, I expect the data on the economy part at least to get a lot worse. See, I’ve been talking about what I call an eye of the hurricane situation where there’s calm and then it’s going to be followed by turbulence, and in fact, we’ve got two eyes of the hurricane. We’ve got one for inflation, and we’ve got a second one for payrolls.
Let’s start by talking about what I see in the inflation story, because it’s a lot worse than what you might imagine…
So let’s start with the consumer side, CPI and then we’ll get to the producer side, PPI. That’s what businesses see when it comes to consumer inflation. It ticked up just a little, but we got to understand that when we talk about this thing, it’s sausage making. A lot of things go into it.
So we’ve got to kick out the things that don’t matter if we simply want to ask and answer the question, are tariffs creating inflation? The answer is categorically yes.
If we purely look at the things that we import, whether it’s apparel, home goods, appliances, sporting goods, car parts, whatever it is that we’re importing, inflation was tame until we got to April when all of a sudden the tariffs hit. So when you look at the data and you go back a couple months, inflation’s kind of mild and then all of a sudden you get to May and then June inflation surges, right?
And this is compelling.
Why the delay? Why the eye of the hurricane here? Why did we not see inflation sooner?
If it actually hit in April, it’s June we’re looking at now, well, the answer’s pretty simple. It’s what I’ve been describing as front running. All these retailers and everybody else ran out and they stockpiled as much as they could before the April tariffs hit. So they have about 60, 90 days of inventory that they built up, and then they’re under the new tariff regime. Well, guess what? June is the 60, 90 day period it hit. They don’t have inventory under the old pre tariff prices.
All they’re selling now is inventory that’s under the post tariff and it’s going up. It’s going up sometimes as much as 10% per year on an annualized basis. This is big. Now, at the same time, when we look at producer inflation, it ticked down a little bit, but again, the story is the same.
If we only look at the things that we import, for example, equipment, machinery, auto stuff, furniture, you name it, oh, it’s the same story again. June inflation kicked in pretty hard, and this is just the beginning.
We’re just now exiting that eye of the hurricane, so the inflation story is going to get worse and worse again, that means the odds of a rate cut keep getting pushed out further and further if this inflation story really firms up and stays throughout the summer.
At the same time, where I think the market’s absolutely wrong is the assessment that everything’s okay with payrolls with the labor market in general. Now, they’re not at fault if they simply look at the headline number. If they simply look at the headline number, they say, wow, for the past three months, payrolls have kicked out about 140,000 jobs. That’s a good number. Not great, but not really “wheels are falling off” weak. And then when we look at jobless claims, again, that seems like a pretty good story. They’ve come down dramatically in the last week to a level that makes sense that the economy’s doing strong.
Unfortunately, when we peel back a few layers, we see that in fact there’s nothing but problems. Let’s start with payrolls. That 140,000 has two parts. The private sector, the public sector. We look at the private sector. Again, let’s split that. There’s healthcare and everything else. The core economy, healthcare is like a tax. If you have a job, you are paying for insurance.
And so as a result, healthcare is just basically always going to kick out jobs because they’ve got a guaranteed revenue stream as long as there’s hiring. When we look at all the other rest of the economy, what do we see?
There’s no hiring and there hasn’t been for some time.
The private sector hit the brakes on hiring, and the reason is taking a step back, go back in time. Corporate profits collapsed starting late last year, and they’ve continued to collapse. What we know is last year, fourth quarter this year, first quarter, corporate profits have collapsed from double digits down to low single digits.
Remember, that’s not even inflation adjusted, inflation adjusted. There’s nothing going on for companies when it comes to the profit picture. And as we come into the second quarter results, now that we’re in earning season again, the expectation is profitability on a year over year basis is very weak and it’s very weak.
After we saw all these layoffs happening in the fourth quarter and first quarter, and even in the second quarter for three quarters, in other words, companies have been very concerned about their profits and the only path forward for them really is more layoffs or at least not much hiring and hope for some kind of top line growth.
And that’s what the second half story is going to be all about.
We are basically sitting here with layoffs as the major driver going forward and certainly not hiring. That is a problem for payrolls going forward. If you continue to see healthcare growing, it’ll be a miracle because remember, they grow only in so far as there’s more people being added to the payrolls and that’s not happening.
So as a result, you see even healthcare, payrolls starting to slow down. Now, the real story last month, the reason we kicked off this solid number was really the public sector, and I’ve mentioned it before.
There was a weird calendaring thing in which summer vacation timing seems to have played a role, and the layoffs that typically happen in the June calendar period are now going to occur in the July period. Almost 80,000 people were somehow hired during summer vacation last month.
Guess what? That’s not going to be repeated.
And in fact, that creates an 80,000 hole in this month net. What I’m trying to tell you is the games playing is over when it comes to payrolls. In July, we’re going to see a very weak number for payrolls.
Then we look at jobless claims. Okay, check this out. Jobless claims. In the past seven weeks, we’ve added a little over a hundred thousand more people to the initial claims numbers. Each week, 20,000 people almost were coming in and saying, I don’t have a job more than they were throughout the year. Suddenly we get to late May and June and we’ve got more people being laid off about a hundred thousand. What’s problematic about this isn’t that it went up, and now that it’s come down, it looks like things are back to normal. What’s problematic is continuing claims.
These are the people who are raising their hand and saying, I lost my job and for a couple of weeks now, if not more, I haven’t been able to get a new job. That number’s going up almost the same amount. We lost a hundred thousand extra people, and the number of continuing claims have gone up. 65 to 70,000 companies are not hiring. In other words, companies are not just not hiring, but the layoffs have picked up.
And again, this is all happening before we take into account that Doge is back to laying off. The courts have ruled that Trump can do that. We’ve got these severance packages, things where people are considered still on the payrolls and ineligible for jobless claims as long as they’ve got some kind of package, a three month, four month package. Well, guess what? Those are now ending bottom line, this economy is soggy.
We’re seeing soggy retail data. We’re seeing a lot of sogginess in the economy because companies, they got to make their earnings. It’s not about companies, it’s about the consumer economy. And consumers can only spend what their paychecks allow them to spend. They’re going into more debt, but even that has limitations.
Ultimately, we have plateaued.
Maybe the Big Beautiful Bill will drive more excitement into this economy and charge it up, but a lot of that has to happen at year end and into next year for the next few months. It’s not happening. People are gone. They’re on vacation. They’re not going to change what they’re spending money on right now until they see things change in their paychecks, and that’s not happening anytime soon. Net, we’ve got a weak economy.
We’ve got more inflation than is perceived, and as a result, this is a tricky place for the Fed. It is stagflation, and I simply don’t have a good handle on where the Fed will go. But I do feel strongly that July is not a rate cut month.
We’re going to win it folks.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics