Note: I am travelling until August 11. Postings may be irregular and somewhat shorter than usual.
CONSUMER WATCH!!!
On June 30 I wrote:
“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.”
Thursday’s consumer income and spending data confirmed that Americans are not in a spending mood as most people thought, or still think.
- Real expenditures rose 0.1% MoM, 0.0% in the last 3 months and are unchanged in the last 6 months.
- All spending categories are weak: since March,
- real spending on goods is down at a 2.8% annual rate with real durables down 10.4% a.r.;
- even non-durable goods are up only 0.8% a.r.;
- and real services barely registered any growth in June (+0.051%) to grow at an unusually low 1.1% annualized rate in the last 3 months, better than Q1’s 0.64% rate but still indicative of a distressed consumer. Real services grew 1.7% on average between 2010 and 2019 and 2.9% on average in 2023-24.
- Wells Fargo has real discretionary services down 0.7% YoY in June, the first negative reading since the Great Financial Crisis.
- WF writes that real durables “fell the past three consecutive months and is down in five of the first six months of the year. Real durable goods spending is now down 3.0% since December, consistent with our theme of a trend decline in discretionary spending, which is still underway.”
Coming on the heels of Q2 GDP revealing underlying demand (real final sales to private domestic purchasers, actually consumer and business capex spending) up only 1.2% annualized in Q2, a marked slowdown from the ~3% average clip at which it ran at last year. Thankfully, business fixed investment spending was kept up by equipment investment (+5% annualized), impressive after the Q1 +20% surge.
The reality is that the US economy is slowing fast and actually more than the numbers suggest. The all-important consumer is on strike.
Source: U.S. Department of Commerce and Wells Fargo Economics
It’s not only the widely covered low consumer confidence level that is a problem, it’s the more meaningful slowdown in nominal income growth along with accelerating inflation. Nominal wages and salaries rose only 0.1% MoM in June, slowing every month since March. Disposable income is down in May-June and flat in real terms in all of Q2.
Friday’s employment data for July confirmed the slowdown in labor demand nobody wanted to see.
U.S. Hiring Slowed Sharply Over the Summer Jobs numbers for May and June are revised down sharply, while July’s figure falls short of expectations
The U.S. added a seasonally adjusted 73,000 jobs in July, the Labor Department reported Friday, below the gain of 100,000 jobs economists polled by The Wall Street Journal had expected to see.
Revisions cut down the jobs growth originally reported for May and June by a combined 258,000. That left May as having added just 19,000 jobs and June just 14,000.
The unemployment rate rose slightly to 4.2% from 4.1%. The number of people unemployed for 27 weeks or longer increased to 1.83 million from 1.65 million in June. That increase in the ranks of the long-term unemployed could be a reflection of an environment where layoffs have been low, but companies have been reluctant to hire, making it harder for people without work to find employment. (…)
Revisions have been consistently negative in 2025, with the Labor Department lowering its initially reported job count every month through June.
For June, the jobs numbers that were most notably much lower than originally reported were in state and local education.
When the June employment report was released a month ago, it had shown an increase of 63,500 state and local education jobs. Economists at the time said that was likely a fluky gain attributed to seasonal swings in school employment that the Labor Department can struggle to adjust for.
The revised figures took that June job gain down to 7,500.
The recent trend in downward revisions could reflect the fact that not all businesses respond to the Labor Department’s monthly employer survey in time for the initial report. Those that do are more likely to be large, well-capitalized and seasoned. Later responders might be less equipped to handle challenges such as high tariffs and the sharp slowdown in the supply of immigrant labor. As their responses come in, the numbers get revised lower. (…)
Aggregate payrolls are up 5.3% YoY in July, actually accelerating from +4.7% on average in May and June, suggesting better consumer spending in July…
… but the acceleration only comes from hours worked having increased in July after falling in June:
Weekly hours have simply hovered along their low 34.2-34.3 level since April 2024
Removing hours worked from the equation, we can see how the employment component has disappeared in the last 3 months, leaving wages as the only contributor to income growth since May:
The slowdown is visible and concerning; wages cannot keep rising much if labor demand disappears.
The two dissenters at the last FOMC are proving right. The American consumer is actually feeling it and is reining in his spending.
While income is slowing, core inflation went from 2.2% YoY in April to 3.1% in June. Real disposable income was up only 1.7% YoY in June, down from 2.7% in April.
And tariffs have yet to hit, however temporary they may prove to be.
From Axios: Price hikes have arrived
A growing number of consumer goods companies are resorting to price hikes as they grapple with increased costs associated with tariffs.
- Adidas warned today that it may hike prices in the U.S. as it faces a $231 million increase in costs in the second half of 2025 in connection with tariffs, Reuters reported.
- Andre Schulten — CFO of Tide, Charmin and Gillette maker Procter & Gamble — said yesterday that the company will raise prices on about 25% of its products to account for tariffs. That’s more than usual, he added on an earnings call.
- Others that have recently announced higher prices include Walmart, Ralph Lauren, Mattel, Subaru and Nike.
Meanwhile, surveys and anecdotes about price increases have been piling up for weeks.
62% of Americans surveyed said they’ve “experienced price increases on everyday goods and services as a result of recent tariffs,” according to an Intuit Credit Karma survey released July 8.
From my July 18 post: some import prices: last 3m a.r., June YoY (%)
- All imports excluding food and fuels: 3.3 1.0
- Industrial supplies & materials excluding fuels: 3.7 4.3
- Industrial supplies & materials, durable: 8.5 5.7
- Unfinished metals related to durable goods: 13.0 5.7
- Finished metals related to durable goods: 19.3 12.3
- Capital goods: 3.6 1.0
- Automotive vehicles, parts & engines: 0.8 0.9
- Nondurables, manufactured: 1.6 -1.2
- Durables, manufactured: 2.0 –0.1
The consumer side has been spared for the most part so far (last 3 lines) but there is acceleration. Industrial prices are exploding. Remember, import prices do not include tariffs.
ECI: Firmer Q2, but Labor Costs Continue to Ease on Trend
Labor cost growth picked up slightly in the second quarter. The Employment Cost Index rose 0.9% in the three months through June. The slight strengthening over Q2 contrasts with the more timely data on average hourly earnings growth, which decelerated during the quarter after having strengthened early in Q1.
The Employment Cost Index is generally considered a better barometer of labor cost growth. Unlike average hourly earnings, it controls for compositional shifts in employment, while also capturing benefit costs and public sector compensation trends.
But both series suggest that the cooler picture of labor costs remains intact as the jobs market is no longer overheated, and that the labor market is not a meaningful constraint on the Fed’s efforts to return inflation to its 2.0% target.
Over the past year, employment costs and average hourly earning are up 3.6% and 3.8%, respectively, roughly on par with the nominal pace needed to hit the Fed’s inflation target once accounting for growth in labor productivity.
Wages and salaries rose a solid 1.0% over the quarter, lifting the year-over-year rate up a tenth to 3.6%. While solid gains among incentive paid-occupations helped bolster the second quarter’s outturn, strength was widespread. Meantime, benefit costs rose 0.7%, a notable moderation from the first quarter’s increase of 1.2%. The increase in benefit costs over the past year (3.5%) is roughly in line with wages & salaries, suggesting some of the solid growth in total compensation is tied to sources other than disposable income.
Despite widespread strength in Q2, the overall trend in private-sector wage growth continues to be flattered by recent pay gains among unionized workers. Similarly, pay growth has been firmer within the public sector, with wages & salaries among state & local workers up 3.9% over the past year. Government employees have higher union representation than private sector and are likely seeing stronger wage growth today due to the lag that typically comes with union wage contract negotiations.
As the tailwinds from excess liquidity built up during the pandemic have largely run their course, income growth has become the primary determinant of consumption growth. Coupled with higher inflation, the slower trend in employment and wages & salaries growth ushers in a constraint consumer purchasing power and is making it difficult for businesses to fully pass on the cost of tariffs.
We expect labor costs growth to moderate slightly further over the second half of the year as tepid interest in hiring and low turnover limits upward pressure on compensation cost growth. In short, we remain of the view that the labor market is not a source of significant inflationary pressure at present.
But also not a source of significant income growth amid rising inflation.
Today we also got the Manufacturing PMIs:
S&P Global’s: US manufacturing PMI falls below 50.0 for first time this year in July
The headline index from the report, the seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®), recorded 49.8 in July. That was down noticeably on June’s 52.9 and, following six successive months of growth, represented a first overall deterioration of operating conditions in 2025 so far.
Weakness in the headline PMI reflected some softness in market demand, with new orders up only fractionally and to the weakest degree of the year so far. Panelists pointed to the continuation of client uncertainty, especially in relation to tariffs.
This led to ongoing hesitancy in committing to new orders, most notably amongst international clients. New export orders were down for the first time in three months according to the latest data, with manufacturers in some instances reporting lower sales with key trading partners like China, the European Union and Japan. (…)
Some weakness in order books and signs of excess capacity – backlogs of work fell in July having risen slightly the previous month – meant firms were reluctant to replace leavers and hire additional workers. Overall employment numbers were fractionally down as a result, the first time a net reduction has been recorded since April. (…)
On the price front, input costs continued to rise steeply, again linked to tariffs, although the rate of inflation softened noticeably on June’s near three-year high. Selling prices continued to increase markedly, rising to the second greatest degree since November 2022.
- The ISM via Goldman Sachs:
The ISM manufacturing index declined by 1.0pt to 48.0 in July, against consensus expectations for an increase. The underlying composition was mixed, as the new orders (+0.7pt to 47.1) and production (+1.1pt to 51.4) components increased, while the employment component declined (-1.6pt to 43.4).
The new export orders component declined by 0.2pt to 46.1, while the imports index increased by 0.2pt to 47.6. The supplier deliveries component declined by 4.9pt to 49.3, indicating a faster pace of deliveries, while the average lead time for production materials was unchanged at 85 days (vs. an average of 67 days in 2019 and a peak of 100 days in July 2022). The inventory index decreased by 0.3pt to 48.9.
The prices paid measure declined by 4.9pt to 64.8. There were 14 mentions of tariffs in the press release, compared to 16 in June.
Survey respondents noted that their businesses are impacted by “higher tariffs on costs of raw materials and components both sourced domestically and from overseas” and they expect “expenses will be higher in the third and fourth quarters as they consume the inventory…received in the second quarter.”
The bold stuff above is important, even more so if demand weakens.
FYI:
Most and least AI-proof jobs (Axios)
Microsoft released a study assessing jobs’ vulnerability to being replaced by AI based on whether AI is currently being used for that work, how successfully it does so and how much of that occupation’s work is accounted for by AI.
Most vulnerable:
- Interpreters and translators (Score: 0.49, Number employed: 51,560)
- Historians (0.48, 3,040)
- Passenger attendants (0.46, 20,190)
- Sales representatives of services (0.46, 1,142,020)
- Writers and authors (0.45, 49,450)
- Customer service representatives (0.44, 2,858,710)
- CNC (computer numerical control) tool programmers: (0.44, 28,030)
- Telephone operators (0.42, 4,600)
- Ticket agents and travel clerks (0.41, 119,270)
- Broadcast announcers and radio DJs (0.41, 25,070)
Least vulnerable:
- Dredge operators (0.00, 940)
- Bridge and lock tenders (0.00, 3,460)
- Water treatment plant and system operators (0.00, 120,710)
- Foundry mold and coremakers (0.00, 11,780)
- Rail-track laying and maintenance equipment operators (0.00, 18,770)
- Pile driver operators (0.00, 3,010)
- Floor sanders and finishers (0.00, 5,070)
- Orderlies (0.00, 48,710)
- Motorboat operators (0.00, 2,710)
- Logging equipment operators (0.01, 23,720)
The math: 238,880 “least vulnerable” vs 4,301,940 “most vulnerable”.