US Economy: Tariffs, Consumer Spending, and Federal Reserve Policy

Consumer Spending and Tariffs

• 📉 Consumer spending is expected to go through a soft patch in the third quarter, with weakness observed in both goods and services.
• ⚠️ This slowdown is partly attributed to demand being pulled forward in anticipation of tariffs and existing price increases.
• ⚖️ A bifurcated consumer is evident, with higher-end consumers and businesses faring better than lower-end consumers who are more squeezed by tariffs, acting as a regressive tax.

Global Economic Impact of Protectionism

• 🌍 American protectionism, through tariffs, is reshaping global trade and investment patterns, with an estimated hit to the world economy of $2 trillion by the end of 2027.
• 📈 While financial markets may react positively to trade deals, the overall impact of trade barriers is a headwind to global growth, with the effective US tariff rate at its highest since the 1930s.

Capital Spending and Economic Boost

• 💰 The US tax legislation, with 80% accelerated depreciation for capital spending, is expected to significantly boost corporate cash flow.
• 🚀 Capital spending is highlighted as an underappreciated driver of economic growth, creating productivity, profitability, and lifting potential GDP growth and living standards.
• 🛠️ Deregulation is also identified as an important support for the US and global economy.

Labor Market and Productivity

• 💼 Businesses investing more through capital spending eventually leads to spending on jobs and wages, historically growing faster than housing or consumer spending.
• ⚠️ The labor market is currently showing signs of softening, with elevated continuing claims and companies reluctant to hire due to trade uncertainty.
• 📈 Improvement in corporate profits is anticipated to lead to a stronger labor market by 2026, driven by stronger productivity growth and a low inflationary environment.

Federal Reserve Policy Outlook

• 🏦 The Federal Reserve is expected to keep rates unchanged this week, as the economy does not require further rate cuts, especially with stimulus already coming from tax measures and deregulation.
• 📉 While further rate cuts are not deemed necessary, there's a possibility of at least one cut, as previous cuts from the previous fall are still working their way through the economy.
• ⚡ Tax cuts and deregulation are seen as disinflationary through improved productivity growth, rather than inflationary.