Month: June 2025

The U.S. Economy Pushes Through the Trade War

The day the WSJ headlines the above, we got the first hard hard economic data, one that covers 70% of the US economy. Here’s Wells Fargo’s account (my emphasis), followed by my own:

Consumer Resilience Wearing Thin

Real consumer spending fell 0.3% in the second month of the second quarter and that development comes on the heels of a sharp downward revision to first quarter consumer spending in yesterday’s third-look at GDP. This may be a bit short of a seismic change, but it completely changes the narrative on the health of the consumer and reconciles the head-scratching disparity between plunging confidence and a swaggering consumer unencumbered by tariffs or a weakening labor market.

The narrative of an unshakable consumer was never quite accurate. Some of that message was already revealed in yesterday’s GDP revisions which showed consumer spending is now estimated to have increased at a limping-along pace of just 0.5% compared to a more jaunty 1.8% pace in the initial estimate. Revisions were particularly hard on services where the pace of spending slowed to 0.6% from a first estimate of 2.4%.

Today’s report gets into the detail a bit more and what emerges is a consumer whose spending patterns are more closely aligned with the deterioration in consumer sentiment we have seen in other reports. It also turns out that consumers were setting aside more in savings each month, a revelation brought on by the revisions. (…)

Specifically, the recent data have incorporated changes designated by the Social Security Fairness Act and American Relief Act. This led to a surge in social security and proprietors income in recent months, and now a tumble in May and was responsible for the 0.4% drop in personal income, or the first decline in nearly four years.

Excluding social security and proprietors income, personal income would have risen closer to 0.2% during the month and importantly, wages & salaries, the bulk of income, was still rather strong rising 0.4% and suggests households still have the means to spend.

The narrative that the economy can absorb tariffs without any meaningful pass-through to prices took a few hits today as well. First, to be clear, on a broad level it is still true that inflation progress remains broadly resilient. The core PCE deflator rose just 0.2% last month and 2.7% over the past year. (…)

Rather what we mean is that in the underlying detail we can already find undeniable evidence of tariff impact.

Other than an automobile, an appliance purchase is among the biggest of big-ticket, durable goods purchases many households will make. Consumer prices of major household appliances rose 4.3% in May, marking the second-largest monthly gain on record after the COVID pandemic. The third-highest gain was in 2018 under Trump’s first term amid tariffs on washing machines. One of the top questions we get these days is “When will the tariffs show up in the inflation data?” This chart shows the answer: we are already seeing it, you just need to know where to look.

While everyone is trying to figure out just how inflationary tariffs will be, the revised recent trend in spending tells us consumers may not be as willing to take prices today. Price fatigue is at last settling in. Survey evidence and anecdotal conversations we have with clients suggest at least some firms are awake to this idea, which is leading them to hesitate on fully passing tariffs on or spreading out the pass through.

We still expect consumers will keep spending to the extent they have the means to, but the latest data reveal slightly less momentum behind spending today and a bit more choosy behavior among consumers. Today’s data suggest real personal consumption expenditures are tracking to rise closer to a 1.0%-1.5% annualized clip in Q2.

Since January, we all hailed the resilient consumer. However surprising that was given the turmoil, American consumers raised their hands, most importantly, their spending, particularly in March when they front loaded on durable goods without cutting services. The revisions totally change this “reality”.

These are huge revisions, from a solid +1.8% to only 0.5% (+0.46%), actually stalled speed given population growth of 0.7%. And this was with March’s tariffs front loading which boosted real expenditures 8.5% a.r. after –6.5% in January and –1.2% in February, well before “Liberation Day”.

Consumption grew 1.1% in April but sank 3.3% annualized in May with real services down 0.3%.

Real spending on services rarely decline MoM. In fact their first drop since January 2022 was in January 2025. They have declined in 3 of the last 5 months and are up a paltry 0.36% annualized in the first 5 months of the year (2010-19 average: +1.7%).

So the “resilient consumer” has not increased its consumption since December (actually –0.2%), the first meaningful slowdown since the pandemic and a very rare occurrence outside of recessions.

This happened in spite of continued growth in real labor income, resulting in a 5-month jump in the savings rate from 3.5% to 4.5%.

Should we fret about that?

Not if we look at the 2023-24 years when the savings rate was 4.6%.

Yes if we consider that it averaged 6.5% in 2017-2019 and that it came down after 2021 when the pandemic bounties boosted spending unusually well above labor income.

Stalling mostly un-cyclical services are of concern: they generally do not weaken when total expenditures ex-durables do. They are this time, signaling unusual caution.

Importantly, spending on durables has been very strong since last fall, first as dealer inventories normalized, and in March April as Americans advanced purchasing cars ahead of expected price increases. Meanwhile, growth in other goods and services slowed measurably even while labor income remained solid.

The dichotomy between confidence measures and actual spending is thus essentially explained by Americans replacing their aging cars when availability improved and when prices were still un-tariffed.

But new car sales were only 15.6M annualized in May (still below pre-pandemic levels) after 17.5M in March-April. The forecast for June: 15M units.

Meanwhile, air travels and hotels, especially sensitive to moods about the economy, are notably soft this spring.

So while most pundits were impressed by the relatively sluggish May inflation data, little attention is given to signs of sluggish consumer demand.

Recall that retail sales (mostly goods spending) decreased 0.9% in nominal terms in May, restrained by autos, following a downwardly revised 0.1% drop in April, marking the first back-to-back decline since the end of 2023. Spending at restaurants and bars, the only service-sector category in the retail sales report, fell by the most since early 2023.

Sluggish demand is also seen in housing as Bloomberg illustrates.

New-home sales fell 13.7% in May, the most in almost three years, as rampant incentives from builders fell short of alleviating affordability constraints. YTD sales are down 3.2% YoY but May was down 6.3% YoY. The latest results show homebuilders are sitting on rising inventories amid mounting economic challenges, including mortgage rates stuck near 7%, higher materials costs due to tariffs and a slowing labor market.

Amazingly, traffic to new housing developments has simply collapsed this year: Americans don’t even want to consider buying a new house.

Existing home sales are down 2.2% YoY so far this year, –2.7% in the past 2 months. Housing overall is not bullish for durables spending.

It so happens that the savings rate generally fluctuates inversely with spending on durable goods relative to disposable income. People normally dissave or borrow to purchase cars or furniture, not for non-durables or services.

Having splurged on durable goods with COVID-19 money and facing heavy tariffs on most goods, the risk is that the appetite for goods is waning, which could result in a rising savings rate.

As noted by Wells Fargo, the only positive in May’s personal income and spending data was that wages and salaries rose another 0.4% MoM, the 2025 monthly average so far. With total PCE inflation essentially nil since March, thanks to lower energy prices, Americans still enjoy decent growth in real disposable income.

The other, associated and compounding risk, is the slowdown in employment growth, from +1.4% YoY on year ago to 1.1% in May.

Job openings keep dropping:

While unemployment is clearly worsening:

BTW: the WSJ tells us that “the best-performing stock since the February high is the discount store Dollar General, up around 50%. It isn’t an outlier. Its rival Dollar Tree is the 13th-best performer in the S&P 500, up around 30%.”

More signs of distressed consumers.

Dollar General CEO Todd Vasos said on the Q1 earnings call on June 3rd that while the company’s core customer “remains financially constrained,” Dollar General has seen more activity from both middle- and higher-income customers.

“Higher-income customers have been a meaningful growth driver for us,” Dollar Tree  CEO Michael Creedon told investors, specifically noting the chain saw an increase in customers with household incomes of more than $100,000.

Data from Placer.ai shows that foot traffic to both retailers surged in April as some tariffs went into effect.

Costco CFO Gary Millerchip reported during its Q1 earnings call that even affluent members are trading down, with notable growth in value categories like private-label goods and lower-cost proteins

Houston, we seem to be having a problem. Houston? You there?

The S&P 500 surged 3.4% last week to close at a record high. Junk bonds gained for a fifth week. The WSJ Saturday:

Wall Street is throwing a summer party with markets just closing out their best cross-asset advance in more than a year on receding fears of a global trade war, igniting a buying frenzy in everything from tech funds to junk bonds.

With the S&P 500 enjoying its first record since February, it’s the triumph of investor optimism at a moment of high uncertainty around the economy, valuations and government policy

Still, bulls are latching onto signs of cooling inflation and improving consumer sentiment even as jobless claims rise, the housing market stays cool, global trade softens and hopes fade for an imminent Federal Reserve interest-rate cut. (…)

Volatility that shook markets just weeks ago has completely faded, replaced by a headlong rush into risky bets. Retail traders have dived back in as systematic investors have hiked exposure. The exuberance now hinges on the economic backdrop delivering enough good news to justify stretched prices. (Bloomberg)

Tariff Impacts: Delayed or Avoided?

By Minneapolis Fed president Neel Kashkari

(…) Why hasn’t the trade war shown up yet in the data? I see two likely explanations: The economic effects of the trade war are delayed, or companies are finding ways to avoid the tariffs (or some combination of both). (…)

Our outreach to industry contacts suggests many businesses are reluctant to pass on price increases to customers, especially if trade deals could soon emerge and reduce overall tariff rates. Why anger customers unnecessarily if tariff rates may soon come down?

In addition, many businesses report having built inventories in anticipation of some tariff increases, and they are now working down those inventories while charging customers based on the prices at which those inventories were acquired. If tariff rates remain high because trade deals do not quickly emerge, those businesses suggest they will then have to pass on price increases to customers.

In addition, we know that the actual applied tariff rates on many imported goods depend on when cargo was loaded onto ships in foreign ports. For example, cargo loaded onto ships in Asia on April 4 was not subject to the reciprocal tariffs, while cargo loaded April 5 was.

Cargo coming from Asia can take up to 45 days to make it to U.S. ports and then must be transported to distribution centers and then on to customers. It is possible that goods from Asia subjected to high tariffs are only now making their way to customers. These two factors suggest the economic effects of increased tariffs could merely be delayed.

(…) We have heard from some business contacts that they are rapidly adjusting their supply routes to find lower effective tariff paths. In addition, companies are bringing some goods into the U.S. under favorable terms of the U.S.-Mexico-Canada Agreement. And some sectors have been successful in seeking exemptions from tariffs, such as consumer electronics from China.

Indeed, the actual or effective tariff rate based on measures of revenues collected at U.S. ports suggests a paid-tariff rate of closer to 8 percent. Eight percent is still more than three times larger than the average effective tariff rate last year but is far, far smaller than the headline tariff announcements that had generated substantial attention among households, businesses and investors. (…)

As noted above, consumer prices of major household appliances rose 4.3% MoM in May, the second-largest monthly gain on record after the COVID pandemic. For what it’s worth, my household just ordered a Korean-made washer/dryer combo in Canada for CAD$2,877 pretax, equivalent to USD$2,100. The exact same combo in Florida currently sells for USD$3,040, 45% more.

Totally abnormal.

The S&P 500 2Q earnings season will begin July 11th with 73% of S&P 500 companies reporting between July 11th and August 1st. This should provide investors with important insights on how companies are adjusting to increased tariff rates. The effective US tariff rate based on announced policies has risen by roughly 10 pp to 13%. Goldman economists believe the effective tariff rate will eventually be increased by an additional 4 pp to 17%. From GS:

Analysts forecast S&P 500 EPS year/year growth will decelerate to just 4% in 2Q from 12% in 1Q. Consensus estimates show margins contracting sequentially, which explains the slowdown in corporate profit growth. We expect the S&P 500 in aggregate will beat this low bar. The median stock is also forecast to report EPS growth of 4%.

If companies are forced to swallow the cost of tariffs, it would represent downside risk to margins. Our economists assume consumers will absorb 70% of the direct cost of tariffs. However, some recent business surveys have indicated lower pass-through, and the May inflation report showed limited tariff imprint. Analyst revisions to margin estimates have been more negative for companies most exposed to tariffs compared with the typical stock. Early earnings results offer conflicting messages on the margin outlook.

Consensus expects that sales growth slowed modestly to 4% from 5% in 1Q, but most of the anticipated deceleration in 2Q EPS growth is accounted for by margins.

Consensus expects S&P 500 margins expanded by just 13 bp year/year in 2Q compared with 109 bp of expansion in 1Q. On a sequential basis, consensus forecasts imply margins contracted by 50 bp to 11.6% from 12.1%. We expect the S&P 500 in aggregate will beat the low bar set for 2Q.

John Authers: MAGA Doesn’t Mean Making Profits Great Again

(…) After-tax profits account for an unprecedented 10.7% of gross domestic product, when in the last 50 years of the 20th century, they never exceeded 8%. The only time approaching their current share of the economy was in 1929 on the eve of the Great Crash. If the nation is to deal with inequality, money must be redistributed from somewhere; corporate profits are an obvious source of funds.

Elements in the Trump coalition have long held an anti-corporate agenda. A few months ago, Adrian Wooldridge argued in this space that MAGA wanted to “end capitalism as we know it.” Specifically, he contended that many leaders in the Trump coalition wanted to “deconstruct the great workhorse of American capitalism: the publicly owned and professionally managed corporation.”

These are strong words, but sound understated compared to the writings of Kevin Roberts, head of the Heritage Foundation and a lead creator of Project 2025, an ambitious and radical agenda for Trump 2.0. He argues that BlackRock, the world’s largest fund manager and a pillar of contemporary US capitalism, is “decadent and rootless” and should be burned to the ground — a fate it should share with the Boy Scouts of America and the Chinese Communist Party.

For Marjorie Taylor Greene, an outspoken Trump supporter in Congress, “the way corporations have conducted themselves, I’ve always called it corporate communism.” She has urged government investigations of companies that stopped donations to Republicans after the Jan. 6, 2021, attack on Congress.

Steve Bannon, Trump’s campaign chief in 2016, complained to Semafor that only $500 billion of the US government’s $4.5 trillion came from corporate taxes. “Since 2008, $200 billion has gone into stock repurchases. If that had gone into plants and equipment, think what that would have done for the country.”

He advocated a “dramatic increase” in taxes on corporations and the wealthy. “For getting our guys’ taxes cut, we’ve got to cut spending, which they’re gonna resist. Where does the tax revenue come from? Corporations and the wealthy.”

Several current policies are not explicitly anti-corporate, but more or less guaranteed to have that effect.

Michel Lerner, head of the HOLT analytical service at UBS, points out that in data going back to 1870, the correlation between tariffs and companies’ earnings yield (a measure of their core profitability) has been consistent. Tariffs hurt companies. Looking at the cash flow return on investment since 1950, it has risen (meaning companies grew more profitable) directly in line with rises in imports as a proportion of GDP.

Research done jointly by Societe Generale Cross-Asset and Bernstein demonstrates that globalization has benefited US companies not only through international sales (40% of revenues for S&P 500 companies) but also through lower costs. In 2001, when China joined the World Trade Organization, the S&P’s cost of goods sold accounted for 70% of the revenues generated by selling them. It had been around this level for many years. That has now dropped to 63% — a massive improvement of 7 percentage points in this basic margin. Technology, consumer and industrial firms have gained the most — and stand to lose the most from deglobalization.

Trump 2.0 policies so far have redistributed from shareholders to workers. Vincent Deluard, macro strategist at StoneX Financial, points out that the only tax not cut by the One Big Beautiful Bill currently before Congress is corporate income tax. “The grand bargain of the Big Beautiful Bill is to compensate for the tariffs’ inflationary shock with personal income tax cuts,” he says. “If exchange-rate adjustments, foreigners, and consumers do not pay for tariffs, corporate profits will.”

Beyond that, eliminating illegal immigration and restricting foreign students raises labor costs. Threats to tax foreign investments in section 899 of the bill — which now appear likely to be withdrawn — risked reducing capital inflows and make it harder to raise finance. (…)

Politicians have increasingly felt emboldened to intervene in companies’ pricing decisions, something that’s been off-limits since Richard Nixon’s ill-fated price controls in the early 1970s. Kamala Harris proposed “anti-gouging” policies in her unsuccessful presidential campaign; more recently, Trump forced a climbdown by companies like Amazon that proposed to itemize the impact of tariffs on the prices they charged.

Rising to the top of a company never used to be a ladder to mega-wealth. That was reserved for entrepreneurs who founded their own firms. Modern executive pay has changed that and allowed CEOs to become billionaires by meeting unchallenging targets for their share price. The gulf between their pay and workers’ wages shrieks of injustice; according to the Economic Policy Institute, the CEO-to-worker compensation ratio reached 399-1 in 2021; in 1965, it was only 20-1. From 2019 to 2021, CEO pay rose 30.3% while those workers who kept their jobs through the pandemic got a raise of 3.9%.

This can easily be dismissed as the politics of envy, but executive compensation now arguably skews the entire economy. Andrew Smithers, a veteran London-based fund manager and economist, and nobody’s idea of a leftist, has long inveighed against the bonus culture, which he holds responsible for a disastrous misallocation of capital.

Smithers argued that America’s problem was “two decades of underinvestment”:

The major cause has been a change in the way company managements are paid. The 1990s saw the arrival of the bonus culture, which massively shifted management incentives and thus changed management behavior. Sadly, the change did immense damage to the economy. Managements were encouraged to invest less and, with lower investment, growth faltered.

He argues that companies increased their investment in response to corporate tax cuts in earlier generations, but stopped doing this once executives were paid to prioritize their share price. That led them to cut back on investment, spending money on acquisitions and share buybacks. That dampened growth, but also ensured better returns in the short run for shareholders. (…)

Last May 22, I posted exactly about Authers’ points:

China spends nearly as much as the US on R&D with a 40% smaller economy on a PPP basis.

US R&D investments totaled $1.1 trillion (21%) more than China’s since 2015. Why did the USA fall behind in so many critical areas? Perhaps less planning, poor execution and less efficient allocation of money.

Annual US corporate pretax profits rose by $1.9T since 2015 thanks to profit margins exploding from 13.9% to 22.3%. Corporate federal taxes rose only $160B.

Since 2015, US corporations distributed an increasing share of profits in dividends. This Ed Yardeni chart shows flat undistributed profits post GFC …

… but actual retained profits to reinvest were even lower after buybacks which almost doubled in the last 10 years, leaving fewer $ to reinvest while boosting consumption … and the trade deficit.

Other Yardeni data reveal that US manufacturers’ profits were flat between 2015 and 2019 but exploded 50% post pandemic. Dividends paid by US manufacturers steadily rose from $250B annualized in 2015 to $350B in 2019 and to nearly $450B in 2024.

Bruce Mehlman’s piece this weekend included these comments and charts… without adding how Trump’s policies are working directly against US innovation:

• America has led the world in R&D investments for a long time, but China is quickly catching up. Per the AAAS, “China is publishing more research, is applying for more patents, has more researchers and is accelerating efforts that fuel scientific discoveries, while the U.S. has plateaued or is decreasing efforts in many of those same areas.”

• Immigration has powered innovation. America’s “secret sauce” for generations has been its capacity to attract and retain the world’s best and brightest – as students, researchers, founders, employees – with immigrants making outsized contributions to U.S. inventions, patents, start-ups and economic power. (NBER)

• Universities are critical players in the innovation ecosystem. As they have since WWII, America’s universities are actively developing a wide range of defense technologies, driven by both government funding and the entrepreneurial spirit of student-founded startups. Higher education is especially important to basic research.

A May 21, 2025 WSJ article detailed how China is increasingly bettering the US in critical areas:

China has raced ahead in many strategic sectors—and in some cases is catching up with the U.S. Its electric-car companies are among the world’s best. Chinese AI startups rival OpenAI and Google. The country’s biologists are pushing the boundaries of pharmaceutical research, and its factories are being filled with advanced robotics.

At sea, Chinese-made cargo vessels dominate global shipping. In space, the country has been launching hundreds of satellites to monitor every corner of the Earth. Beyond frontier technology, Beijing is pursuing greater self-reliance in food and energy, and has bulked up its military.

• Chinese companies have been buying as many industrial robots as the rest of the world combined, enabling some factory owners to experiment with highly automated plants that can operate in the dark. For much of the past decade, three-quarters of the robots installed in China came from foreign manufacturers, such as in Japan or Germany. By 2023, Chinese robot makers captured nearly half of the local market, according to the International Federation of Robotics.
• [Shenzhen-based] UBTech says that 90% of its more than 3,000 suppliers in recent years were based in China—a sign of how much China can rely on its own growing ecosystem of suppliers. The company is also incorporating technology from Chinese artificial-intelligence pioneer DeepSeek to help the robots make better decisions.
• China’s homegrown reactor model allows Beijing to better control costs and construction timelines, while eliminating the danger that the U.S. could one day refuse to sell China more reactors. Efficient government coordination, readily available financing from state banks and a highly-developed nuclear supply chain means China has already managed to build some Hualong One reactors in about five or six years. The latest Westinghouse reactors in the U.S. took more than a decade to complete, at far higher costs.
• [Battery maker] Contemporary Amperex Technology and BYD have spent more than $20 billion combined on R&D.
• Last year, when a group of U.S. think tanks ranked the world’s best such commercial satellite systems, Chinese firms won five out of 11 gold medals. The U.S. had four.
• [Huawei] has been gearing up to test a new chip it hopes will be more powerful than Nvidia’s H100 chip, released in 2022. As China’s chips improve, Morgan Stanley projects the country’s self-sufficiency rate in graphics processing units—essential in creating AI systems—will jump to 82% by 2027 from 11% in 2021.

97% of the article is about smart planning and focused execution backed by strong R&D investments.

Other than that:

• Investors are fleeing the US dollar and long-dated bonds. According to EPFR, net outflows from long-dated US bond funds spanning government and corporate debt hit $11 billion in Q2, marking a powerful shift from the average inflows in the previous 12 quarters of about $20 billion.
• The Reformed Enhancement Plan, meanwhile, is a push to exempt Treasuries from banking leverage ratios in order to increase banks’ capacity to absorb more government bonds and ease the trading of them by authorized agents. According to Goldman Sachs, the SLR reform, proposed by the Fed could free the balance sheet of US global banks by as much as $5.5 trillion. This would guarantee continuing monetary growth.
• “The US Treasury Department has called on Congress to scrap a provision in Donald Trump’s flagship budget that would allow Washington to raise taxes on foreign investments, reversing a plan that had spooked Wall Street.” The so-called “retaliatory tax” would have given the President authority to impose taxes up to 20% on investors from countries who impose what deems unfair taxes on US companies.

SPACs are back — maybe just with the same old playbook and players

After a pandemic-era surge that ended in a wave of flameouts, Special Purpose Acquisition Companies (SPACs) — “blank-check” firms that raise money via IPO, then look to merge with a private company — are making a comeback.

According to Bloomberg, US SPACs have raised $11 billion so far in 2025, more than 5x the total at this point last year, and now account for nearly two-thirds of all US IPO volume.

Driving the revival are some familiar names. Goldman Sachs is reportedly returning to the SPAC business after a three-year pause, only with a more selective approach. Chamath Palihapitiya, once dubbed the “SPAC King,” said last week he’ll “probably” launch another, as he concedes his last run “wasn’t a success by any means.” Meanwhile, regulatory tailwinds may be helping, with new SEC Chair Paul Atkins signaling a potential rollback of the stricter rules imposed under his predecessor.

However, cautionary specters from the 2020-21 SPAC frenzy are still looming large.

Many of the pandemic-era cycle’s high-profile SPACs have cratered since their IPOs, due to overhyped projections, rising interest rates, and tougher scrutiny. Palihapitiya’s own deals — including Virgin Galactic, Clover Health, Opendoor, and Lucid— have mostly plunged 70% to 90% from their IPO prices (perhaps an explanation for why 71% of respondents in his recent X poll said he shouldn’t return). QuantumScape, despite jumping 65% this week, remains far from its peak, having never generated revenue, while several others have been delisted.

There are, of course, a few exceptions. Trump Media surged on political momentum despite its weak fundamentals; DraftKings has ridden the sports betting boom; and Hims & Hers has built buzz in telehealth — though it certainly looks a little under the weather as of late.

Yet many of the old problems persist. SPACs are once again chasing the hyped sectors du jour, like crypto, quantum, and autonomous vehicles, and over 90% of completed SPAC deals now trade below their IPO price, per Reuters.

FYI (via Callum Thomas):

Source:  Topdown Charts

Source:  @i3_invest

Canada Drops Digital Tax That Infuriated Trump to Restart Trade Talks

And this might also infuriate him:

China’s tighter export controls squeeze wider range of rare earths Additional customs inspections cause long delays that threaten to disrupt global supply chains

China’s export controls are spilling over into products beyond the rare earths and magnets officially identified by Beijing, threatening broader supply chain disruption and undermining US claims that a new trade deal had resolved delays to shipments. (…)

China’s commerce ministry and customs officials have started to demand additional inspections and third-party chemical testing and analysis of products that are not included in the original control list, according to Chinese companies and western industry executives.

“As long as it contains even a single sensitive word [such as magnet], customs won’t release it — it will trigger an inspection, and once that starts, it can take one or two months,” said a salesperson at a Chinese magnet exporter. 

“For example, titanium rods and zirconium tubes are also being held up,” the person said. “The actual controlled item is titanium powder. While our rods and tubes are not on the control list, they still aren’t being cleared.” (…)

“Even if the products don’t contain controlled substances . . . they worry that, if customs inspect the shipment, it could affect other goods in the same container and cause delays for the whole shipment,” the person said. (…)

According to a survey conducted among western companies in China in June, more than 60 per cent of respondents reported that their export applications had not been approved. (…)

An Inside Look at the Q1 2025 GDP Third Estimate

Real gross domestic product (GDP) decreased at an annual rate of 0.5 percent in the first quarter of 2025 (January, February, and March), according to the third estimate released by the U.S. Bureau of Economic Analysis. In the fourth quarter of 2024, real GDP increased 2.4 percent. The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP, and a decrease in government spending. These movements were partly offset by increases in investment and consumer spending. (Link) (…)

I inserted the rectangles on this chart to highlight the bump in the importance of consumer spending on the overall US economy since the pandemic. Really significant. What gave? Mostly net exports which were –2.7% of GDP in 2019 and versus –4.2% in Q1’2025…

Durable Goods Orders Surge 16.4% in May

New orders for manufactured durable goods rose to $343.59B in May, its highest level in history. This represents a 16.4% increase from the previous month, the largest monthly jump since 2014, and a 19.8% rise from one year ago, the largest annual change since 2021. The latest reading was nearly double than the projected 8.6% monthly increase. (…)

If we exclude transportation, “core” durable goods were up 0.5%, higher than the expected 0.1% increase. Core durable goods are up 2.3% from one year ago. The next chart shows the year-over-year percent change in core durable goods. (…)

Core capital goods new orders are manufacturers’ new orders for non-defense capital goods excluding aircraft and is an important gauge of business spending, often referred to as “core capex.” Core capex is company spending that is used to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, and equipment. This month, core capex was down 1.7% month-over-month and up 3.9% year-over-year.

America’s deep housing hole

Pending home sales — deals that are in contract but not yet closed — rose 1.8% in May over last month but are still at record lows, per data from the National Association of Realtors released Thursday. (…)

“The bottom in home sales appears to be over with the possibility of a strong upswing once mortgage rates decline,” NAR chief economist Lawrence Yun said in a statement — though he cautioned that the market is seeing higher-than-normal cancellation rates and last-minute cold feet. (…)

As home builders contend with a freezing sales market, ICE is making things even more chilly. In a recent survey of home builders, conducted by Zonda, some companies reported that the immigration enforcement agency is starting to visit job sites.

• Visits from ICE have impacted workforce participation, they said. Any time there’s an ICE visit, builders tend to see more “no-shows” as workers — even those who are here lawfully — worry about getting caught in the net of the federal government.
• The industry didn’t comprehend how many negative hits housing would face from White House policies this year, says Ali Wolf, chief economist at Zonda.

Data: National Association of Realtors. Chart: Axios Visuals

China Confirms US Trade Framework, Vows to Review Exports

China said it has further confirmed details of a trade framework with Washington, echoing US Commerce Secretary Howard Lutnick’s earlier comments about a US-China agreement that stabilized ties. (…)

“The Chinese side will review and approve eligible applications for export of controlled items in accordance with the law. The US side will correspondingly cancel a series of restrictive measures taken against China.” (…)

Speaking to Bloomberg TV on Thursday, Lutnick added that the White House has imminent plans to reach agreements with a set of 10 major trading partners. (…)

Referencing a June 5 call between Trump and Chinese President Xi Jinping, the ministry said in the Friday statement the two countries should work together to promote the stable development of economic and trade ties.

China earlier this month said it would tighten controls over two chemicals that can be used to make fentanyl, in an apparent olive branch to the US that may help maintain their fragile trade truce. (…)

In the Thursday interview, Lutnick said US “countermeasures” imposed ahead of the London talks would be lifted — but only once rare earth materials start flowing from China. Those US measures include export curbs on materials, such as ethane that’s used to make plastic, chip software and jet engines.

The agreement comes as the US moves to ease restrictions on exports of ethane, with the Commerce Department earlier this week telling energy companies they could load that petroleum gas on to tankers and ship it to China — but not unload it there without authorization.

• Von Der Leyen Says EU Will Be Ready If US Trade Talks Break Down

The European Union is prepared for all eventualities in its trade negotiations with the US, including for a breakdown in talks, Ursula von der Leyen said, after discussing the latest proposals from the Trump White House with the bloc’s leaders.

The European Commission president said at a press conference in the early hours of Friday that her team is still assessing the latest US tariff offer. (…)

The question dogging the leaders and the commission, which handles trade matters for the EU, is whether to accept an asymmetrical trade deal with the US or to strike back, risking escalation and the ire of the US president. (…)

The EU needs to reach an agreement with Trump by July 9, when levies on nearly all of the bloc’s exports to the US increase to 50%. (…)

“We have less than two weeks,” [German Chancellor Friedrich Merz] said. “You can’t agree a sophisticated trade agreement in that time.” (…)

French President Emmanuel Macron told reporters after the summit that a quick deal is preferable — but only so long as it is “balanced.”

“The best tariff deal with the US would be zero to zero,” Macron said, insisting that if the US decides to keep 10% tariffs, the bloc would have to respond. “Otherwise we would be naive, or weak, or both,” he said. “And we are neither.” (…)

The US is asking the EU to make what the bloc’s officials see as unbalanced and unilateral concessions, Bloomberg reported earlier. Discussions on critical sectors — such as steel and aluminum, automobiles, pharmaceuticals, semiconductors and civilian aircraft — have been particularly difficult. (…)

• China’s Top Diplomat to Visit Europe as Tensions With US Linger

Chinese Foreign Minister Wang Yi is set to visit Europe next week, a trip that comes as Beijing tries to counter US tariff pressure by improving ties with other trading partners. (…)

Guo didn’t directly mention the US, but said “unilateralism, protectionism and bullying are rampant,” making it important for China and Europe to “maintain multilateralism and free trade.” He added that Wang would “make political preparations” during the trip for the next exchanges between China and the European Union, without elaborating.

A summit between the EU and China is expected to take place in the latter half of July. (…)

European Allies Wary of Buying American as They Plan Defense Buildup

For European countries that just approved the biggest increase in military spending in decades, “Buy American” is looking a lot less appealing than it once was. They may have no choice.

As the allies rush to rebuild their fighting forces, leaders are confronting the reality that they’ll have to rely on the US for many of the new weapons they’re planning to buy, a sales pitch driven home by President Donald Trump on his visit to Europe this week.

They fret that they may be put at greater risk if they deepen their dependence on a US whose president has embraced their main enemy – Russia – and rattled some with threats to annex their territory. Those deeper ties have become an increasingly hard sell at home, with electorates cautious about a closer embrace with the US.

Allied leaders like French President Emmanuel Macron have pushed for relying on European companies to provide the weapons and the EU fast-tracked a €150 billion facility for just that purpose after Trump was elected. Canada is considering pulling out of the US-led F-35 fighter program and buying Swedish planes instead.

“We should no longer send three-quarters of our defense capital spending to America,” Canadian Prime Minister Mark Carney said earlier this month. (…)

Trump’s abrupt decision to briefly suspend intelligence sharing with Ukraine earlier this year alarmed allies, according to officials, fueling fears that the US might hobble American-made weapons in a crisis. The worries got so bad that the Pentagon had to issue a public reassurance that the F-35 fighter didn’t have a “kill switch.”

But the planned buildup – worth as much as €14 trillion ($16 trillion) over the next decade if related infrastructure is included, according to Carlyle – is far beyond the current capabilities of a fragmented European defense sector that’s been hollowed out by decades of cuts since the end of the Cold War. And the US lead in key areas, especially missiles and other high-tech weapons, means there’s often no real alternative to buying American. (…)

German Chancellor Friedrich Merz, whose government is planning to nearly double spending on core defense items this year, said the European industry needs an overhaul to meet the demand.

“We have far too many systems in Europe, we have far too few units, and what we produce is often far too complicated, and therefore too expensive as a result,” he said this week.

At the Paris Air Show last week, executives from Airbus SE and Dassault Aviation SA sparred openly over who should take charge of their next-generation fighter jet project. (…)

Allies also lack key technologies.

Europe has no rivals as advanced as Lockheed Martin Corp’s F-35 fighter or RTX Corp’s Patriot anti-missile, which has been critical to protecting Ukraine from Russian attacks. Allies have no competitors for key capabilities like ballistic-missile defense and air-to-air refueling. While simpler weapons like howitzers are easier for allies to produce, they still require US satellite systems for precision targeting. (…)

US defense contractors are lining up cooperation deals with European counterparts to hedge against any shift away from American weapons. (…)

But the EU has Ukraine (necessity obliged):

Ukraine is rapidly becoming an important producer of military equipment, driven by necessity, innovation, and significant investment since the start of the full-scale Russian invasion in 2022.

• Ukraine’s arms industry has grown dramatically, with output capacity reaching over $35 billion by 2025—a 35-fold increase from 2022.

• The country is expected to produce 2.5 million drones in 2025, and its drone industry alone expanded more than tenfold in 2024, making Ukraine a global leader in both quantity and battlefield innovation.

• Artillery production has tripled, armored vehicle output increased fivefold, and anti-tank weapon production doubled between 2023 and 2024.

• Ukraine now produces more howitzers per month than all of Europe combined, with monthly output rising from 20 to around 40 units—on par with Russia and far surpassing France or Germany.

• The war has turned Ukraine into a “Wild West” for arms innovation, where new weapons are rapidly developed, tested, and refined under real combat conditions.

• Ukrainian manufacturers have produced new cruise and ballistic missiles, advanced drones (including maritime drones), automated turrets, and remote-controlled weapon stations.

• The government’s Brave1 initiative has fostered over 1,500 military technology start-ups, accelerating the development of new battlefield technologies.

• Ukraine’s defense sector is attracting growing interest from Western defense firms, with joint ventures and local production facilities established by companies such as Rheinmetall (Germany), Baykar (Turkey), and Česká zbrojovka (Czech Republic)476.

• The country is integrating more deeply with the European and NATO defense industries, with co-production agreements and technology transfers aimed at standardizing Ukrainian arms to NATO requirements.

• President Zelensky and government officials have set ambitious targets for 2025, including $30 billion in production and the manufacture of at least 30,000 long-range drones and 3,000 cruise missiles.

• The defense industry accounted for 1.5% of Ukraine’s 4.9% GDP growth in 2023 and now represents 37% of GDP expenditure, with 58% of the state budget allocated to defense4.

• More than 800 Ukrainian defense firms are active, covering a wide range of products from artillery and drones to electronic warfare and battlefield IT solutions.

• Ukraine’s industry is not only meeting a significant portion of its own military needs (covering about a third of the army’s requirements) but is also positioning itself as a future exporter and a key player in the global arms market.

• The government and industry leaders are seeking further investment to fully utilize their expanded production capacity, which currently exceeds what the national defense budget can support. (Perplexity.ai)

A 2024 WSJ article revealed the US problem with drones:

In the world of cheap drones, Skydio was the great American hope. Its autonomous flying machines gave the U.S. defense and police agencies an alternative to Chinese manufacturers, free from the security concerns tied to dependence on Chinese supply chains.

But Skydio’s vulnerabilities came into sharp focus days before the U.S. presidential election, when the Chinese authorities imposed sanctions and severed the company’s access to essential battery supplies.

Overnight, the San Mateo, Calif.-based Skydio, the largest American maker of drones, scrambled to find new suppliers. The move slowed Skydio’s deliveries to its customers, which include the U.S. military. (…)

Now, an even bigger breakthrough looms: mass-produced automated drones. In a significant step not previously reported, Ukraine’s drone suppliers are ramping up output of robot attack drones to an industrial scale, not just prototypes.

The large-scale production of autonomous drones could turbocharge Ukraine’s fight against Russia by overcoming the biggest obstacle those drones face: Russian electronic jamming.

Perplexity.ai:

As of late June 2025, Skydio, the largest U.S. drone manufacturer, has not fully secured non-Chinese battery supplies for its drones, but it is actively working toward this goal. After China imposed sanctions in October 2024—cutting off Skydio’s sole battery supplier, Dongguan Poweramp (a TDK subsidiary)—the company was forced to ration batteries to one per drone and warned customers that new battery supplies would not be available until alternative suppliers were secured, projected for spring 2025.

Throughout the first half of 2025, Skydio continued to face battery shortages, with no public confirmation that non-Chinese battery production had been fully established or deliveries resumed at pre-sanction levels. The company sought assistance from U.S. and Taiwanese officials and explored suppliers across Asia, but as of the latest available updates, Skydio’s inventory remained limited, and rationing policies were still in effect.

While on technology:

Chinese phonemaker touts 200,000 electric SUV orders in 3 minutes Xiaomi’s shares soar to all-time high after company launches pre-orders for YU7 sport utility vehicle

Xiaomi’s shares hit a record high after the Beijing-based smartphone maker said it received 200,000 pre-orders for its latest electric vehicle in three minutes, threatening the positions of BYD, Tesla and other carmakers competing in China’s cut-throat market. (…)

The latest EV, priced at Rmb253,500 ($35,370) to compete directly with Tesla’s Model Y, has been launched at a critical juncture for carmakers in China. (…)

Xiaomi said in a social media post it had received more than 289,000 pre-orders for the YU7 within one hour of the sale starting on Thursday. Chung estimated future monthly sales of the YU7 to be about 60,000 to 80,000 cars.

(…) last year’s release of the SU7, the company’s first car, drew 50,000 orders in 27 minutes. (…)

BYD leads China’s NEV market, with a share from January to the end of April of 29 per cent on sales just shy of 1mn cars. That compares with Tesla’s market share of just under 5 per cent and 3.5 per cent for Xiaomi. Foreign groups, which for decades dominated the market, now have a share of 31 per cent across EVs and fuel-powered cars. (…)

Xiaomi did what Apple, after spending $10B, could not.

Here’s a video on Xiaomi’s cool YU7. You should watch it before reading below.

• Chinese cars are the ones to beat

There’s a dawning realization across the industry that China’s ascendance is both an existential business threat and a national security risk.

Disruption is nothing new for automakers, but they’ve never had to contend with the mountain of complex issues they face now — tariffs, geopolitical tensions, shifting regulations, broken supply chains, artificial intelligence, electrification.

• The emergence of powerful Chinese rivals, though, is a more ominous and permanent threat, experts agree.
• Foreign automakers’ share of the Chinese market has collapsed, while everywhere else in the world — except the U.S. — brands like BYD, Geely and Chery are expanding, opening super-efficient factories and selling hybrids and EVs at prices no one else can touch.
• Now China makes 70% of the world’s EVs and plug-in hybrids.

(…) “The Detroit Three (GM, Ford and Stellantis) used to think of China as their playscape — a land of endless growth and profits. Not anymore,” China auto expert Michael Dunne, CEO of Dunne Insights, tells Axios.

Chinese carmakers have a 30 to 40 percent economic advantage over their competitors, says Terry Woychowski, president of benchmarking analysis firm Caresoft Global.

• They’re more vertically integrated than traditional automakers, producing most components in-house, for example. They also use common parts across more vehicles, enabling lower prices.
• Government support — loans, land and incentives — surely helps, as well.
• Chinese carmakers received $231 billion in government subsidies between 2009 and 2023, according to the Alliance for Automotive Innovation, which represents the U.S. industry.

(…) How China took over the auto industry

In the late 1990s, the Chinese government allowed foreign automakers to enter its emerging market if they formed a joint venture with a Chinese partner and gave them at least 51% control.

• For years, the JV structure proved beneficial for both sides — Western carmakers pocketed billions of dollars selling cars to China’s growing middle class, and fledgling Chinese carmakers got to learn from the world’s best.

• Then, in 2015, China introduced a sweeping industrial plan, “Made in China 2025,” to upgrade its industrial base across various sectors, with “new energy vehicles” (NEVs) as a core pillar.
• China spent the next decade lining up battery supply chains, including raw materials and processing, and perfecting its capabilities in vehicle engineering and manufacturing.

“Imitate, improve and increase” are three words that sum up China’s strategy, according to Caresoft’s Woychowski, whose company specializes in dismantling cars down to their smallest bits for benchmarking purposes.

• A textbook example, he said, is the XPeng G6, which at first glance could be mistaken for a Tesla Model Y.
• In 2022, Tesla stunned the industry by introducing a manufacturing process that used die-casting to produce large sections of the Model Y in a single piece, eliminating hundreds of welded parts. That saved labor, weight and engineering costs.
• A year later, when XPeng launched the G6, it had already improved upon Tesla’s giga-casting innovation.
• Compared to the Model Y, said Woychowski, “they are much more refined castings. They are thinner, they are smaller, they are lighter, they are less expensive and they’re stiffer.”

Chinese efficiency is the industry’s new benchmark.

• Tesla CEO Elon Musk warned Chinese carmakers as so good they “will pretty much demolish” the rest of the industry.
• Or as Ford CEO Jim Farley says: “Everyone talks about how good they are or how cheap they are. What they should be talking about is how fast they are.”

And that was before Xiaomi’s YU7…