{"text":[[{"start":6.19,"text":"Welcome back. Donald Trump’s second term is now six months old. For all the fears around the US president’s tariff-raising agenda, those that believed the American economy would do just fine are feeling vindicated by a few recent data points."}],[{"start":24.080000000000002,"text":"In June, jobs growth beat expectations and inflation data showed only modest signs of a tariff-related bump. The S&P 500 closed at a record high on Thursday. The second-quarter earnings season has so far delivered “better than expected” results for America’s largest companies too."}],[{"start":44.22,"text":"In this week’s edition, I argue that the US economy is far more fragile than these headlines suggest."}],[{"start":50.8,"text":"First, the jobs market. Recent monthly non-farm payroll data releases have surpassed consensus expectations at the first estimate. This has given the stock market a reason to rally."}],[{"start":63.94,"text":"But the total NFP number is misleading. Since February the US economy has created 671,000 jobs, two-thirds of which have come from less dynamic sectors including health, government and education."}],[{"start":78.99,"text":"In June the Bureau of Labor Statistics’ payroll diffusion index for the private sector fell below 50, signifying that more sectors are shedding jobs than gaining them. That is a rarity outside of a recession."}],[{"start":93.92999999999999,"text":"Research by Peter Berezin, chief global strategist at BCA Research, suggests the US labour market is close to the point where any further fall in demand could push up the unemployment rate significantly."}],[{"start":108.10999999999999,"text":"“So far, US employers have been largely responding to the high uncertainty and interest rate environment by closing vacancies,” notes Berezin. “But now job openings are closer to normal, it is getting harder for laid off workers to find another job.”"}],[{"start":125.63999999999999,"text":"There are also concerns around the quality of America’s jobs data, partly because of falling survey response rates. Monthly NFPs were overstated by an average of 75,000 in 2024."}],[{"start":138.07,"text":"Indeed, this year’s run of initially better than expected NFPs has been revised down at subsequent estimates. (Revisions are, however, less noticed by the market.)"}],[{"start":null,"text":"
"}],[{"start":null,"text":""}],[{"start":149.79999999999998,"text":"Second, the housing market. “Property is the most rate-sensitive part of the economy, and as such, it has historically led the economy into recessions,” says Mark Zandi, chief economist at Moody’s Analytics. “This hasn’t happened so far, but with rates remaining stubbornly high, the situation may change.”"}],[{"start":170.92999999999998,"text":"Thirty-year fixed mortgages have long been common in America, and the share of new adjustable-rate mortgages has also dropped sharply since the late 2000s. This means the effects of higher interest rates can take longer to filter into the real economy (and data)."}],[{"start":188.87999999999997,"text":"But now they are biting. First-time homebuyers are allocating a larger share of their median incomes to mortgage payments than at the peak of the housing bubble in 2006. The share of outstanding mortgages with rates above 6 per cent has jumped in the post-pandemic period."}],[{"start":207.21999999999997,"text":"The volume of unsold new home inventories has risen to its highest since mid-2009 too."}],[{"start":null,"text":""}],[{"start":214.05999999999997,"text":"Third, consumption. After fuelling America’s post-pandemic growth spurt, monthly real consumer expenditure has fallen since December 2024."}],[{"start":226.14999999999998,"text":"Low-income households got pinched first: first by high interest rates, and now by price increases linked to tariffs and broader economic uncertainty."}],[{"start":236.89,"text":"But until now, overall spending has been propped up by richer cohorts — the top 20 per cent of the income distribution (who make over $250,000 annually) is estimated to account for more than 60 per cent of personal outlays, according to Zandi."}],[{"start":255.98999999999998,"text":"This is now changing. “Behind the recent moribund consumer spending data are more cautious well-to-do households,” warns Zandi. “Going forward, price increases from tariffs will hurt those on lower incomes more. But as the tighter economy also catches up on the rich, consumer demand could fall faster.”"}],[{"start":275.58,"text":"Data from Pantheon Macroeconomics shows that households across the income distribution are close to extinguishing the excess savings they built-up during the pandemic (as a result of government support and lockdowns). These cash piles had propped up the recent spending boom."}],[{"start":292.32,"text":"Trump’s “big, beautiful bill” isn’t expected to deliver much of a further jolt for consumers. According to the Penn Wharton Budget Model, the legislation will reduce the income of the bottom two quintiles after tax and transfers by 2030. Higher-earning households will gain but mostly indirectly from boosts in corporate profits, which they are also more likely to save than spend."}],[{"start":null,"text":""}],[{"start":318.26,"text":"Fourth, the stock market. The S&P 500 has become increasingly disconnected from real economic variables in the past decade, making it a less useful gauge of the US economy."}],[{"start":331.24,"text":"“The weight of the Magnificent Seven and wider tech sector in US stock indices has grown larger in the past decade — well above its actual share of America’s GDP,” says Jonas Goltermann, deputy chief markets economist at Capital Economics. “About 40 per cent of earnings now come from outside the country too.”"}],[{"start":352.22,"text":"The S&P 600 — an index of small-cap US firms, which rely more on local economic conditions — has fallen since Trump’s second-term inauguration, while the S&P 500 has risen."}],[{"start":366.61,"text":"America’s tech and software industry is also relatively shielded from the tariffs that are currently in place (although the administration is working on sectoral levies)."}],[{"start":377.74,"text":"Elsewhere, however, more than 40 per cent of businesses that use imported goods in both the manufacturing or services industry have so far reported a decrease in net incomes, according to a recent New York Fed survey."}],[{"start":null,"text":""}],[{"start":392.68,"text":"Finally, there are more prosaic reasons for the heightened concerns over Trump’s policy plans and the apparent resilience of the US economy."}],[{"start":401.17,"text":"For starters, the president’s full tariff agenda is not even in force. Right now, according to data from the Yale Budget Lab, the average US effective tariff rate is 16.6 per cent, and from August 1 — the US president’s latest deadline for implementing “reciprocal” levies — it will be 20.6 per cent."}],[{"start":423.27000000000004,"text":"The prevailing rate is roughly seven times higher than where it was last year. But the pass-through of higher prices into the real economy has been restrained by companies drawing down their pre-tariff inventories."}],[{"start":436.51000000000005,"text":"Still, a wedge is opening up between the retail price of tariffed goods and goods unaffected by Trump’s duties, according to data from Harvard Business School’s Pricing Lab. This is harder to pick up in the month-to-month inflation reports, which aggregate a range of imported and non-imported products."}],[{"start":455.2900000000001,"text":"Even if Trump continues to delay tariffs, stockpiles will deplete and prices will ratchet higher based on existing duties. (Analysts expect most inventories to run out over the summer months.)"}],[{"start":469.24000000000007,"text":"In other words, the string of solid second-quarter company results are not a good indicator of the potential impact of tariffs on business at large or where the economy might be in the near future."}],[{"start":482.77000000000004,"text":"The S&P 500’s strong valuation also reflects assumptions around the future, not just recent economic data. Berezin notes that optimism around artificial intelligence is acting as a “strong tailwind” for investors. Moreover, after postponing and curbing his tariff threats several times, analysts appear to be pricing in the so-called “Taco” trade, which refers to the narrative that “Trump Always Chickens Out”."}],[{"start":512.9200000000001,"text":"This bullish outlook may not pan out. As I outlined in the April 27 edition of this newsletter, overpriced US stocks risk giving way to a painful correction."}],[{"start":524.47,"text":"The recent months of uncertainty will also crimp future business activity, even if the president’s tariff plans are watered down again. For instance, BCA Research’s indicator of business investment intentions across the US is in recessionary territory. Hiring plans are down too."}],[{"start":null,"text":""}],[{"start":544.61,"text":"Beneath the headlines then, the US economy is like a frog in boiling water. The jobs, housing and retail markets are decelerating, and are close to a turning point. The optimistic stock market and corporate America’s larger players are shrouding underlying weakness."}],[{"start":563.5500000000001,"text":"The policy environment won’t provide much support either. Uncertainty is keeping the Federal Reserve from cutting interest rates. The administration might think removing Fed chair Jay Powell is the answer. But as rumours of his sacking recently showed, doing so would push up long-term interest rates and dent overvalued US equities. Nor is Trump’s recently passed fiscal bill projected to deliver a significant uplift for the economy."}],[{"start":593.59,"text":"If the US president doesn’t step back decisively from his protectionist agenda soon, it is hard to see what prevents this house of cards from crashing down."}],[{"start":604.38,"text":"Send your thoughts and rebuttals to freelunch@ft.com or on X @tejparikh90."}],[{"start":611.28,"text":"Food for thought"}],[{"start":612.56,"text":"The EU wants faster growth and a stronger banking system. This column suggests fighting the mafia might be a win-win."}],[{"start":null,"text":""}],[{"start":620.29,"text":"Free Lunch on Sunday is edited by Harvey Nriapia"}],[{"start":633.06,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1753090286_9897.mp3"}