Stock market's dismissal of vulnerable economic indicators and recession apprehensions
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The U.S. economy is experiencing a period of moderate growth, with low unemployment and stable inflation measures, according to recent data. However, there are cautionary signs that warrant close monitoring.
The jobs report for the three months ending in July revealed a significant slowdown in job growth, with an average of about 35,000 jobs added per month compared to roughly 128,000 jobs added monthly over the prior three months. Employers are hiring at their slowest pace since 2020, according to data from the U.S. Bureau of Labor Statistics.
Despite this slowdown, the economy's underlying strength is evident in the strong earnings reported by major companies, including tech giants like Meta and Microsoft. The markets have focused on these earnings, with recent reports being "pretty impressive" considering some of the economic data has looked soft of late. Analysts attribute investor optimism to robust corporate profits, the prospect of interest rate cuts at the Federal Reserve, and an abiding expectation that President Trump will not return to the steep tariffs initially rolled out in April.
The outlook for the economy remains uncertain, leaving open the possibility of continued growth and soaring stocks. The markets remain opportunistic about current gains, rather than wary of possible headwinds that may emerge in the coming weeks or months.
However, the combination of elevated tariffs and sluggish hiring could lead to "stagflation," a situation in which the economy slows while prices rise. If the economy sours, the Federal Reserve will likely move forward with interest rate cuts, buoying the market. Lowering rates to stimulate the economy in the face of a potential slowdown threatens to boost spending and worsen inflation.
Inflation remains relatively moderate, averaging 2.6% in the first half of 2025, with a slight expected increase to around 3.0-3.1% in Q3-Q4. The GDP report indicated a slowdown of growth over the first half of the year, with average annualized growth of 1.2% over the first half of 2025, well below 2.8% growth last year.
Consumer spending, which accounts for about two-thirds of economic activity, ticked higher over three months ending in June. Surveys show consumers remain cautious about inflation and economic direction, while business confidence has weakened due to uncertainties like tariffs despite solid spending and corporate earnings.
The Conference Board’s Leading Economic Index (LEI) fell by 2.8% in the first half of 2025, a sharper decline than before, with signals such as weak manufacturing orders and rising unemployment claims. However, the LEI's decline has not yet led to an official recession forecast.
In summary, the evidence points to steady but cautious economic growth with low unemployment and moderate inflation, not strongly indicative of an imminent recession or stagflation. Some warning signs from leading indicators and consumer/business sentiment warrant close monitoring, but as of mid-2025, the outlook is one of moderation rather than contraction or stagflation.
Trump's firing of the head of labor statistics, Erika McEntarfer, hours after the release of a jobs report has raised concerns about the political independence of gold-standard U.S. economic data. Trump claimed without evidence that the jobs data had been "manipulated."
Despite these mixed results, the indexes remain well above where they stood three months ago. The Nasdaq has surged 20% since May, while the S&P 500 has jumped 13%, and the Dow has climbed 7% over that period. The markets remain optimistic, with the tech-heavy Nasdaq ticking up 0.4% since the end of trading last Tuesday, while the S&P 500 has dropped 0.6%, and the Dow Jones Industrial Average has fallen 1.4%. The major stock indexes fell markedly last Friday, but have largely recovered the losses.
- Amidst the growing concerns about a potential economic slowdown, analysts are attributing investor optimism to robust corporate profits, the prospect of interest rate cuts, and a belief that there will be no return of steep tariffs.
- The international climate for business includes uncertainty due to factors such as the ongoing impact of tariffs and the political independence of economic data, which has recently been called into question.
- The economy's strength is not only evident in the strong earnings reported by major companies, but also in the trends seen in international finance, such as the surging of stock-markets like the Nasdaq, S&P 500, and Dow Jones Industrial Average.
- Economists are keeping a close eye on the combination of sluggish hiring and the sustained pressure of tariffs, as this could potentially lead to stagflation, a situation characterized by slow growth and rising prices.
