Highlights:
· The “Great Resignation” has given way to what economists are now calling the “Great Stay.”
· The economic impact of tariffs is showing up in data more slowly than expected but will still likely eventually be a drag on the global economy.
· The U.S. appears to have won the near-term global trade battle as many nations are happy to make major concessions to the U.S. in exchange for stability and predictability. The outcome of the long-term trade war remains more uncertain however, as many nations have started seeking trade partners that are more dependable than the U.S.
· The Fed finally started to cut interest rates, while central bankers in Europe and the U.K. paused.
· Market timing is never sound investment policy. A long-term, compounding-driven approach remains the best path to wealth accumulation and preservation.
Commentary:
“You see minority unemployment going up. You see younger people – people who are more vulnerable economically, more susceptible to economic cycles. That’s one of the reasons, in addition to just overall lower payroll job creation, that shows you that at the margin the labor market is weakening.”
-Jerome Powell, Federal Reserve Chair
The third quarter saw a split-screen economy emerging, with solid top-line economic growth and booming equity markets on one side, and a softening job market on the other. Technology is driving rapid growth in industries that do not require as much labor, resulting in a flourishing stock market and lethargic hiring environment. Harsher immigration policy is also fueling huge shifts in population trends, making it harder to know how many new workers we need for a steady unemployment rate.
The U.S. labor market is nowhere near recession mode, as indicated by a 4.3% unemployment rate that is still low by historical standards and has only ticked up slightly this year. However, a look under the hood tells a different story. Employers are adding jobs at a significantly slower pace than they were at this time last year, jobless claims are climbing, and corporate layoff announcements are accelerating. The number of unemployed workers now exceeds job openings for the first time since April 2021 as the “Great Resignation” has given way to what economists are now calling the “Great Stay.”
New graduates are having an especially tough time landing a job right now, with the number of unemployed new labor force entrants at its highest level since 1988. It is a sign of how reluctant companies have been to hire amid ongoing economic uncertainty over tariffs and policy and the promise of artificial intelligence (AI).
The priorities of CEOs seem to have shifted from hiring to capital spending. A survey of big-company CEOs by the Business Roundtable showed 38% plan to cut their employment over the next six months, but 89% see stable or increased capital spending. These survey results are consistent with Federal Reserve industrial production data that showed that industrial production of business equipment surged in the first half of the year. These are the goods such as tractor trailers, computer servers, and industrial machinery that companies buy to increase their productive capacity when they are expecting future growth.
Tariffs are no longer dominating headlines to the extent they were during the second quarter of the year (although as of the writing of this commentary U.S.-China trade tensions have re-escalated). A big reason could be because the real economic impact of tariffs is showing up in data more slowly than expected. In a competitive market, companies that hike prices could lose market share to a competitor that keeps its prices steady. This is why many companies are reluctant to raise prices until they absolutely must, and until they know that the ever-changing tariffs are going to stick around. This does not mean that we should jump to the conclusion that tariffs are cost-free. Rather, the impact from tariffs that are now higher than they have been in more than a century will likely be more gradual, but still a meaningful drag on the global economy. As higher tariff rates work their way through global supply chains, it is likely to push inflation higher and growth lower, even if the numbers appear muted now. On the plus side, current tariffs appear to be closer to the cost of doing business than a crippling barrier for most companies that could grind global trade flows to a halt.
Tariffs function as a slow burn on the economy, squeezing business margins, reshaping supply chains, and trickling down to consumers. While softer demand may help keep inflation on a downward trend, it also risks tipping the economy into a recession if consumers and businesses pull back too sharply. Already, U.S. business activity is losing steam as companies are facing rising input costs, driven by tariffs, with limited ability to raise prices due to weaker demand. Manufacturing was supposed to be the biggest beneficiary of President Trump’s tariffs, but economic activity has shrunk for six months running and the sector is shedding jobs. This is squeezing profit margins and may be an early warning sign of an economy that is losing speed as 2025 winds down.
Consumer spending data continues to be a bright spot for now, as evidenced by an August report that showed retail sales rose sharply, even as many Americans say they feel glum about the economy and as prices rise on a wide range of goods and services because of tariffs. However, a deeper dive into consumer spending data by Moody’s during the quarter showed that the top 20% of earners now account for more than half of U.S. consumer spending, masking weakness among middle- and lower-income households whose consumption has barely kept up with inflation so far this year. The wealthy continue to benefit from a strong stock market, but some economists warn that if equity prices stumble, the spending of affluent households could slow and expose the weakness among lower-income consumers and smaller businesses that have been tightening their belts.
President Trump has coaxed major players, such as the European Union (E.U.), South Korea, and Japan, to accept the highest tariff rates in decades. He has also forced the hand of several nations to buy more from American companies as part of trade deals. While these deals seem to show that President Trump is winning the near-term global trade battle and bringing in meaningful revenue that lowers the U.S. budget deficit, it remains far from certain that the U.S. will win the longer-term trade war. To date, many nations are happy to make major concessions to the U.S. and get nothing in return to avoid a trade war and bring the stability and predictability that global businesses need. But many nations have already started seeking trade partners that are now more dependable than the U.S. and are redrawing the global trade map – minus the U.S. – in the process.
The Federal Reserve (Fed) continues to face the dilemma of attempting to cut rates enough to prevent a deeper jobs slowdown, but not so aggressively that it reignites inflation. After approving a quarter-point interest rate cut at the September Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell made it clear that there’s “no risk-free path” ahead, “it’s not incredibly obvious what to do”, and that “near-term risks to inflation are tilted to the upside and risk to employment to the downside – a challenging situation.” Inflation currently remains above the Fed’s 2% target, but as mentioned above, the labor market is showing more signs of strain from slower hiring to rising jobless claims.
There are expectations for additional interest rate cuts before the end of the year, but if the Fed gets too aggressive it risks sparking another wave of price pressures just as tariffs start trickling into supply chains. When the Fed began a rate-cutting spree last September, it was premature, and financial markets punished this mistake accordingly. Powell is likely to be more cautious this time around with that experience still fresh in his mind.
For now, however, the Fed has signaled to the market that recent labor market softness outweighs setbacks on inflation. This led traders to believe the Fed’s September rate cut was not a one-off, but rather the start of a broader pivot in U.S. monetary policy. Further complicating matters was the fact that the U.S. dollar continued to slide against global currencies like the euro and yen during the quarter. At some point, a falling dollar risks sparking inflationary pressure through pricier imports. Trade stability strengthens the dollar and the dollar’s role as the world’s reserve currency makes it easier for the U.S. government to borrow and boosts the spending power of American consumers.
What ultimately matters most for the economy is how markets respond to the Fed’s monetary policy moves. If short rates fall but long rates rise in anticipation of higher inflation, economic gains will not occur. The ideal outcome is for investors to believe that the Fed favors low inflation and a sound and stable dollar because that will bring down long-bond and mortgage rates over time.
Shifting to the eurozone, after bringing rates down eight times starting in June 2024, the European Central Bank (ECB) left its key deposit rate at 2% at its July and September meetings. This was a change in course for the ECB, whose aggressive easing campaign entering the third quarter contrasted with the Fed’s reluctance to cut rates in the face of inflationary headwinds. In swapping monetary-policy places with the Fed during the quarter, the ECB signaled it wants to wait for more clarity on how the Trump administration’s tariffs will affect growth and inflation.
For now, the eurozone’s economy is holding up despite the introduction of 15% U.S. tariffs on most of the bloc’s goods. Citing a resilient labor market, a stable inflation outlook, and upwardly revised growth projections for 2025, ECB President Christine Lagarde stated that the “disinflationary process is over”, the eurozone is “in a good place”, but that the ECB is “not on a predetermined path” and future policy moves will depend on economic data.
In England, after cutting its key rate in August for the fifth time since a year earlier, the Bank of England left its key interest rate unchanged at 4% at its September meeting. It did however scale back a program designed to shrink its holdings of government bonds that has attracted increased scrutiny as yields have risen. The U.K. is seeing a slowdown to its labor market like the U.S. Job vacancies have fallen as companies delay recruitment and wait for clearer signals on growth. Like the U.S., it is turning into a “no-hire, no-fire” job market, which is a headwind for the U.K. labor market.
China did not announce any significant new stimulus measures during the quarter. Modest stimulus efforts to date include subsidizing consumer loans and providing financial support to would-be parents. These stimulus measures are widely considered far too modest to keep its industrial engine humming. Economists tend to agree that this stance will need to be revisited if China intends to meet its 5% growth goal as support for Chinese exports from frontloading by U.S. importers to get ahead of tariff deadlines is likely to fade. With it now being harder to rely on exports, China will need to find a way to boost domestic spending if it wants to continue to meet its lofty growth targets.
Despite quite a few economic headwinds, it is never recommended to try to time the top or bottom of a market cycle as it is nearly impossible to predict what will happen next. Look no further than the beginning of this current prolonged bull market cycle that began in 2010 amidst the negative sentiment coming out of the Great Financial Crisis. At that time there were so-called experts predicting a “new normal” punctuated by lower-than-average returns going forward. Literally the opposite has happened.
We will eventually find ourselves in a recession and/or bear market. While prognosticators preaching the end of the world scenarios might draw wide media coverage, long-term, compounding-driven investors will nevertheless continue to be rewarded over most market cycles. As Warren Buffet once said, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
Urban Financial Advisory Corporation – October 2025
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