For a brief time much of the country was fooled or befuddled by an economy that appeared to be strong despite the warnings of economists about the impact of the implementation of Trump’s tariffs and the start of a trade war. The S&P 500 is up about 7.5% year to date. Initial data indicated that 985,000 jobs had been created for the first six months of the year. The unemployment rate has remained steady at around 4%. The inflation rate, as measured by the Consumer Price Index, had fallen from 3% in January to a low of 2.3% in April. Where was the evidence of the dreaded combination of high unemployment and inflation (Stagflation) that was supposed to be the result of Trump’s tariffs? Surely the claims of “mainstream” economists were misguided and Trump had re-discovered the elixir that was the cure for America’s supposed economic ills. The tariffs would create jobs, there’d be no rise in prices, and the Federal Government’s coffers would overflow with money collected from foreign countries who would bear the burden of paying the tariffs. Was it all too good to be true? Yes, indeed it was.
Employment data just released shows that earlier data collected on job creation for the first half of the year indicated that job creation was much higher than what actually occurred. Government job creation statistics, as with all economic data, are revised over time. There is an initial (preliminary) number released for the previous month (e.g., a preliminary number is released in February for January). A revised figure is then released the following month (in March for January), and then a final figure the next month (in April for January). Final figures can vary greatly from the initial release. So what happened in the first six months of this year? While initial figures indicated 985,000 jobs had been created, later revised figures indicate that number was much too high. Instead, only 524,000 jobs were created, a drop of 46%. In other words, the economy is substantially weaker than early data indicated.
Also, throughout the period there was another indicator that the situation on the inflation front was also not so rosy. While the best known inflation measure (the Consumer Price Index) had shown inflation falling, the Core Rate of Inflation (an inflation measure that removes the effect of vilotile food and energy prices) was more cautionary. The Core Rate (at 2.8%) remained stubbornly higher than the CPI and remained steady at that 2.8% rate. When the Core Rate is greater than the CPI rate, it typically indicates that the CPI rate is likely to rise.
Economists had been saying that early results from Trump’s trade war needed to be taken with some caution. One reason was due to the uncertainty surrounding the tariffs. Was Trump just bluffing to improve his negotiating position? If he was serious, would trading partners just give in to his demands? Would tariffs be implemented and then quickly removed as negotiations moved forward? This, combined with Trump’s constant mixed messaging about tariffs, created uncertainty that led businesses to delay reacting too quickly to the threat of tariffs. Surely Trump and his Republican allies realized that, as we have learned from the past, tariffs are damaging to a country’s economic well-being and end up being paid by the consumers in the country that puts in the tariffs, NOT by foreigners. Also, as other countries retaliate by implementing their own tariffs, employment across the globe in ALL countries goes down. Trump and his allies couldn’t REALLY be serious about all this.
And Trump’s reaction to all the recent bad economic news? He fired Erika McEntarfer, the head of the Bureau of Labor Statistics, which is responsible for collecting both employment and inflation data. He claims she was “rigging” economic data for political purposes to make him “look bad”. Also, he continually threatens to fire the one adult in the room, Jerome Powell, the Chair of the Federal Reserve, which is responsible for monetary policy which is the main tool the government has to control inflation. Powell’s crime? Refusing to lower interest rates which would add fuel to the inflaionary risks of Trump’s tariffs.
It has recently become pretty clear that when it comes to tariffs, Trump does indeed mean business. It seems he REALLY does believe his tariffs will lead to a resurgence of manufacturing in the United States, a boom in the economy, Federal Government coffers overflowing with foreign tariff payments, and a new golden age in America. His Republican allies REALLY will just go along with whatever he demands of them. Both Trump and his allies couldn’t be more wrong and we are all about to pay a very steep price.
The bad times are already here and it is about to get much worse.
