Consumer Retrenchment in Goods Spending, Inflation Mild

January’s personal income and spending report was full of surprises. Income came in hot growing 0.9% which was more than double the expected gain of 0.4%. Spending fell on both a real and nominal basis. The decline is the first in 22 months though it does come on the heels of upward revisions to December data.

We have been cautioning about some potential pull-forward in goods spending as consumers try to squeeze in big-ticket purchases before tariffs go into effect. At some point we feared there would be payback. January is sooner than we would have expected to see it. Yet, how else to explain the fact that among the categories posting a decline in January seven out of the top eight decliners were goods categories.

The bottom dropped out beneath motor vehicles & parts spending with a $41.1 billion dollar decline. For most households, this is the definition of a major outlay and the category had seen decent strength rising 3 out of the past 5 months. Recreational goods and RVs made up the second largest decliner in January spending followed by other non-durable goods. Other goods categories in the red included clothing & footwear as well as food & beverages. In fact, the only goods category to post a gain was gasoline and other energy goods, a mostly price-related development.

Source: U.S. Department of Commerce and Wells Fargo Economics

The pop in overall income is partially attributable to one-off factors that typically impact the start of the year. The first is the annual cost of living adjustment (COLA) to social security, which drove this portion of income up 2.8% in January, and accounted for two-tenths of the overall gain in income. Strength can also be traced to receipts on assets and proprietors income.

Yet all of the strength can’t be talked away. Wages & salaries, which comprises a bulk of households income and thereby spending power were also up a strong 0.4%, adding to a string of solid gains the past three months consistent with a sturdy labor market. All told, in adjusting for inflation and taxes, real disposable personal income rose 0.6% in January, or at the fastest pace in a year.

Inflation is still a challenge not just for the Fed but for consumers looking to spend on discretionary items. Earlier this month we learned the CPI surprised to the upside and this morning’s data show the Fed’s preferred measure of inflation, the PCE deflator, rose 0.3%, which was enough to drive the year-over-year rate lower to 2.5%. Goods inflation (+0.5%) outpaced services inflation (+0.2%) for the first time in at least six months.

The core measure (excluding food and energy) was up a similar amount in January, which drove the annual rate down to 2.6% from an upwardly revised 2.9% in December. On a three-month average annualized basis, core inflation sits at 2.4% today.

While risks today look skewed to the upside around inflation, the pricing environment remains highly uncertain. Consumers are price fatigued, and major retailers have acknowledged this. Tariffs are the most obvious threat to the pricing environment and the last few tenths to the Fed’s 2% target remain in the crosshair.

Source: U.S. Department of Commerce and Wells Fargo Economics

Consumer spending has been a stalwart driver of economic growth throughout the current expansion. Yesterday’s Q4 GDP revisions lifted the annualized rate of consumer spending to a blistering 4.2%, the second fastest quarterly expansion in consumer spending in the past three years. Today’s report does not fundamentally alter our thinking on the sustainability of consumer spending though it does offer a look at what consumer life might look like in a world where goods spending is put on ice.

Americans were actually not retrenching in January other than in their homes.

The sharp declines in goods, particularly in motor vehicles and RV sales, are mostly weather related. Wards’ estimates that February light vehicle sales were +1.9% MoM, +1.5% YoY.

In fact, their spending power improved. Wages and Salaries rose 0.4% MoM and +5.5% annualized in the last 4 months. Aggregate weekly payrolls are up 4.9% during the same period.

Total expenditures were up 5.5% YoY in January, +5.6% on average in the previous 4 months.

Core PCE inflation came in at +0.28% MoM, +3.5% annualized, thankfully nowhere close to the 5.5% a.r. spike in core CPI.

Averaging both measures, inflation seems stuck around 3.0% for now. With income rising 5.0-5.5%, real expenditures should grow 2.0-2.5% unless tariffs or fear interferes…

Fed Paper Finds Tariffs May Raise US Consumers’ Everyday Costs

President Donald Trump’s proposed tariffs on imports from China, Mexico and Canada could lead US consumers to face higher prices on everyday purchases, according to new research published Friday.

The final cost to consumers will depend on how much of the tariffs are passed on to end consumers by companies. Prices on a portion of consumer expenses could rise by 0.81% if businesses pass through half of the tariff costs, or by 1.63% if they fully transfer the expenses, according to new research from the Federal Reserve Bank of Atlanta. (…)

A look at the tariffs enacted against China in 2018 and 2019 by the first Trump administration shows the levies were fully passed through to import prices. (…)

Actually, the Atlanta Fed research says that the new tariffs would directly hit “about a quarter of the total consumption basket” by between 0.81% and 1.63%, importantly adding that “the aggregate effect on the overall Consumer Price Index (CPI) further hinges on the price sensitivity of the remainder of the excluded consumption categories, particularly transportation, services, energy, and housing.”

So +0.8-1.6% is the minimum cost increase on everyday purchases, hitting almost immediately, with no account for categories beyond the scope of the research that will be hit gradually as importers pass their cost increases through the supply chains.

The paper adds:

In terms of the timing of the price effects, recent studies indicate that tariff effects are both immediate and persistent. Collectively, these findings imply that future tariffs are likely to be transmitted swiftly to retail prices and have lasting impacts. (…)

Moreover, for two key reasons, our estimates in this paper should be viewed as a lower bound. First, tariffs can affect prices indirectly through input-output linkages, amplifying their impact beyond the direct pass-through captured in our analysis. Second, for Canada and Mexico, we rely on aggregate import shares and do not account for firm-level heterogeneity in expenditure shares and import dependence. If firm-level expenditure shares positively correlate with import dependence, our aggregate estimates for Canada and Mexico likely underestimate the true price effects.

For example, as the WSJ explains,

Tariffs on Mexican-made cars would likely mean not just higher prices for vehicles shipped across the border, but on all cars as other manufacturers and dealers see a chance to eke out more profit while gaining market share. (…)

Washing machines were hit with tariffs in 2018, which researchers found led to an increase in the price not just of washing machines but dryers also. The two are typically bought together, and retailers saw an opportunity to earn more.

The study also found that prices of domestically made, not just imported, washers rose, as manufacturers raised prices owing to higher labor costs and tariffs on imported parts, and to match price hikes on imported machines.

Keep in mind that categories excluded from the research, covering 75% of the consumption basket, include autos and parts (18% come from Canada and Mexico), lumber (24%), crude oil (26%), natural gas (8%) and electricity (1%) (tariffs on energy are 10%).

The BLS will release the March and April CPI data on April 10 and May 13 respectively.

As to the actual release of tariffs on Canada-Mexico, due tomorrow,

he’s sort of thinking about right now how exactly he wants to play with Mexico and Canada and that is a fluid situation,” [Commerce Secretary Howard] Lutnick said on Fox News’ Sunday Morning Futures, speaking of Trump. “There are going to be tariffs on Tuesday on Mexico and Canada, exactly what they are, we’re going to leave that for the president and his team to negotiate.”

“Play”!!!

Investor focus needs to shift from core inflation to headline (total) inflation because spending power must now be closely monitored as tariff inflation hits many essential goods and services, threatening economic growth.

• The labor market has shifted from steady to volatile and increasingly dependent on wages (vs jobs and hours) to sustain labor income growth.

• Since 2021, labor income easily outpaced PCE inflation …

• … but more erratically in 2024 and negatively in December 2024 and January 2025 when 3-5-4.0% inflation outpaced 2.5-3.0% labor income growth.

PCE inflation in the 4-5% range would squeeze (and anger) Americans.

In my Feb. 10 Daily Edge I showed that consumer expenditures have become increasingly dependent on wage growth to compensate for slowing gains in jobs.

Important? Not if employment does not slow down more and not if inflation remains well contained. But the seemingly solid American consumer is on somewhat shakier grounds as buffers against potential troubles in the labor market (jobs/wages) or higher inflation (tariffs) have weakened in recent months.

I also noted that 88% of the new jobs created in 2023 and 2024 were in only 3 sectors (Education and Health Services, Governments and Leisure and Hospitality). That leaves only 12% of jobs creation from all other activities which together account for some 50% of all jobs.

• The first 2 sectors are targets of the DOGE boys.
• We don’t know what the damage will be but recent trends in unemployment claims are bad:

For consumers and the overall economy, slowing employment and broadly higher tariffs may prove unsettling.

Meanwhile:

Euro-Zone Inflation Cools as ECB Enters Final Phase of Cuts Consumer prices rose 2.4% from year ago in February

(…) While still elevated, services inflation — which policymakers have been paying particular attention to — dipped to 3.7%. That’s the first major retreat from 4% since April 2024. (…)

Durables Pop May Say More About Tariffs than Underlying Demand

In what may be a bid to get ahead of tariffs, new durable goods orders exceeded expectations with outperformance particularly evident in core capital goods orders.

New orders for durable goods jumped 3.1% in January, which came with upwardly revised data that show a less-bad drop at the end of last year (-1.8% versus -2.2% previously reported). Much of this month-to-month volatility can be traced to aircraft orders specifically reflecting a turbulent net orders trend at Boeing as strike-related challenges work their way through activity.

The aircraft noise is not the only factor. When is comes to business investment, it is difficult to get a clean read on what is happening in the U.S. economy at present. In GDP revisions separately released [last week] we learned that equipment spending cratered in the fourth quarter, falling at a 9% annualized rate (down from the previously reported 7.8% drop). How do we square that with this apparent resurgence in durable goods orders?

Core cuts of the orders data suggest a more stable trend in underlying activity. Excluding the broader transportation sector, durable goods orders were flat in January. If we look at nondefense capital goods orders excluding aircraft specifically, orders were up 0.8%, building on a prior month increase and showing a decent pickup off of a stalled two-year trend. This cut of core capital goods orders has now advanced at the fastest pace on average in three months since mid-2022.

Part of the advance in underlying orders may reflect a pull-forward in demand ahead of potential tariff threats, as purchasing managers stockpile not just imported but domestic goods as manufacturers source a lot of their inputs from abroad. To the extent this pickup in core capital goods orders does reflect a pull forward in demand, we should brace for some payback as that intention subsides mid-to-late in the year.

The recent improvement should manifest in near term growth, but it’s hard to see conditions overly supportive of a broad and sustained recovery in capex spending amid elevated uncertainty and still-high rates. The durable goods shipments data give us the early read on how equipment investment is faring for Q1 and to say these data have been volatile is an understatement.

Despite the Q4 drop in real equipment spending, which was due largely to weakness in aircraft shipments, core capital goods shipments including aircraft jumped in December, up 3.8% after four consecutive monthly declines. Shipments were strong again in January, with this measure up 3.2%, which suggests we’re set up to see a rebound in first quarter equipment investment.

China Factory Activity Returns to Expansion But Trade Risks Grow

The official manufacturing purchasing managers’ index was 50.2, versus 49.1 in January, the National Bureau of Statistics said Saturday. The median forecast of economists surveyed by Bloomberg was 49.9. A number above 50 points signals growth.

The non-manufacturing measure of activity in construction and services rose to 50.4 from 50.2 last month, the statistics office said. That’s in line with the forecast of 50.4.

Also, the production subindex rose to 52.5 in February, compared with 49.8 in January. The subindex for total new orders rose to 51.1 in February, compared with 49.2 in January, while the gauge for new export orders remained in contractionary territory for the tenth straight month, but rose to 48.6, compared with 46.4 in January.

The private Caixin Manufacturing PMI

improved to a hree-month high of 50.8 in February. That was up from January’s 50.1 and, although indicative of only a marginal improvement in operating conditions, represented the best outcome for the headline index since last November. (…)

Growth rates for both output and new orders were their best since last November. Panellists reported that a general improvement in economic conditions and the introduction of new products had supported the fifth successive monthly increase in total new orders.

Demand strengthened from foreign clients, according to panellists, with new export business rising modestly for the first time since last November.

(…) output charges declining slightly in February for a third month in a row.

 

Japan Manufacturing PMI:

Operating conditions deteriorate for eighth monthin a row

Japanese manufacturing production fell further at the midpoint of the first quarter of 2025, though both output and new order inflows decreased at softer rates. The pace of reduction was only modest, but often attributed to weak sales and confidence in domestic and overseas markets. The subdued manufacturing performance was also reflected in a broad stagnation in employment levels and solid falls in purchasing activity and backlogs of work.

On the price front, input costs continued to rise at a robust rate that was the joint-strongest since last August (with December 2024). In response, manufacturers raised their selling prices at a faster rate.

EARNINGS WATCH

From LSEG IBES:

482 companies in the S&P 500 Index have reported revenue for Q4 2024. Of these companies, 63.5% reported revenue above analyst expectations and 36.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.2% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 16.9%. If the energy sector is excluded, the growth rate improves to 20.4%.

The estimated revenue growth rate for the S&P 500 for 24Q4 is 5.2%. If the energy sector is excluded, the growth rate improves to 5.8%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 8.1%. If the energy sector is excluded, the growth rate improves to 9.6%.

Trailing EPS are now $245.28. Full year 2025: $270.46e. Forward EPS: $270.29e.

Revisions are still downward…

…mainly on consumer-centric and financial companies:

• “We trim our 2025 EPS growth forecast from 11% to 9% and maintain our 2026 forecast of 7%. Our revision reflects the fact that EPS growth in 2024 was stronger than expected but economic data in 2025 have been softer than expected…..economic data in 2025 have been slightly weaker and the tariff outlook slightly more hawkish than we expected.” (GS)

Cash or no cash?

• Professional investors? “Look Ma, No Hands!

• Berkshire:

Is this why all that Buffett cash?

Where’s the Risk Premium?  On the other hand, the current level of policy uncertainty (and it is very real, we are in very unusual territory here with tariff risk, government reforms and fiscal contraction, geopolitical shifts, and a frenzied pace of activity and announcements by the new admin… there is a real uplift in uncertainty and greater volatility) — Normally the way these two lines travel you’d want to see an Equity Risk Premium at least twice that of the current. You can get that by either dropping the 10-year yield to about 2% or by chopping stockmarket valuations in half… or some combination thereof (neither good!)

Oh and for completeness, since that ERP has long-term inflation in it too, you could also get there via a 20% increase in CPI [also not good, and also likely to do bad things to bond yields and stocks!]
(Callum Thomas)

Source:  Topdown Charts Professional

Speaking of cash or no cash: “America’s net interest payments on our debt are the highest among OECD nations, nine times higher than Japan’s (which has both greater debt as a share of GDP and a smaller economy!) China spent 0.96% of their GDP on interest payments last year, 1/4th America’s burden.” (Callum Thomas)

A reverse trade deficit that, maybe, better not be reversed! Foreign purchases of US equities has far exceeded domestic buying:

Source:  Simon White

Here is a sample of resolutions proposed by Republican lawmakers in the past few weeks: Florida’s Ann Paulina Luna wants Congress to pass a law adding Trump’s likeness to Mount Rushmore alongside presidents such as George Washington and Abraham Lincoln to reflect his “towering legacy”; New York’s Claudia Tenney proposes to make Trump’s June 14 birthday a federal holiday alongside Washington’s; a bill from Tennessee’s Andy Ogles would amend the US constitution to allow Trump to run for a third term so he has time to restore “America to greatness”. North Carolina’s Addison McDowell would rename Washington’s Dulles airport the Donald J Trump International Airport to thank him for the new “golden age of America”.

Who’s MIA?

Fear (part 2)

What’s going on?

Treasury yields are falling (weakening economy) but credit spreads are as low as they get (good economy, profits):

Source: Simon White, Bloomberg Markets Live Blog

Investor angst has spiked:

Professional investors? “Look Ma, No Hands!

Initial jobless claims rose 22k to 242k, above expectations. The four-week moving average of claims increased by 9k to 224k. DOGE?

Trump Plans Another 10% Tariff on Products From China The U.S. president cites the country’s role in the fentanyl trade

The U.S. plans next week to impose an additional 10% tariff on imports from China over its role in the fentanyl trade and move forward with 25% tariffs on products from Canada and Mexico, President Trump said Thursday, setting up a pivotal week for his protectionist trade agenda.

The China move, slated to take effect Tuesday along with the Canada and Mexico actions, doubles up on the previous 10% additional tariff Trump placed on Chinese products this month.

In a post Thursday on his Truth Social social-media platform, Trump reinforced his threat to impose 25% tariffs on products from Canada and Mexico. Later, in the Oval Office, he said America’s neighbors hadn’t done enough to curb drug smuggling to win another delay for those duties. The administration had postponed the Canada and Mexico tariffs for 30 days at the beginning of February to allow for negotiations. (…)

The announcement came a day after Trump appeared to hint that the Canada and Mexico tariffs could be delayed again, telling reporters that they were scheduled for April 2. The administration backed off those comments at the time, and on Thursday a White House official said that “as of now, the decision has been made” to impose the tariffs, though talks are ongoing. (…)

Canadian Prime Minister Justin Trudeau on Thursday noted that less than 1% of the fentanyl smuggled into the U.S. comes from Canada. “Canada is not the source of problems for the United States,” he said during a news conference in Montréal. “If on Tuesday there are unjustified tariffs brought in on Canada, we will have an immediate and strong response.” (…)

Beijing so far hasn’t made an offer to the Trump administration that shows a stepped-up commitment to reducing China’s exports of chemicals used to make fentanyl, according to people close to Beijing’s decision-making. The people said the lack of an offer from China on fentanyl was a reason that no direct conversation had yet taken place between Trump and Chinese leader Xi Jinping. (…)

Unlike Canadian and Mexican leaders, Xi has shown little interest in focusing solely on a deal about fentanyl, the people said. Rather, he aims to negotiate a broader agreement with Trump that could define the tone of bilateral relations.

In a bid to prepare for trade talks with the Trump administration, the Journal reported early this month, Beijing has been trying to put together an initial proposal that involves reinstating a trade agreement signed with the first Trump administration in early 2020, a renewed pledge not to devalue the yuan to help its exporters, and an offer to make more investments in the U.S. But Xi has yet to make that offer, the people said.

For now, Beijing thinks it can handle the 10% additional tariffs. The levies have raised the average duty rate on Chinese imports to 24.5% from about 14.5% as of 2023, according to Gavekal Dragonomics, an economics-consulting firm. Chinese companies already have proven adept at avoiding U.S. tariffs by rerouting their products through other countries.

Bloomberg:

Trump’s new measures came without public forewarning and took officials in both countries by surprise. Neither side on the working level was aware the additional 10% tariffs were coming, according to a person familiar with the matter. (…)

China typically hits back at tariffs only after they come into effect. Beijing responded to the last round of levies just seconds after they kicked in, with measures including additional tariffs, an antitrust investigation into Google, tightened export controls on critical minerals, and the addition of two US companies to a blacklist of unreliable entities.

Short of a last-minute deal, China could retaliate next week using those same tools and potentially reimposing some tariffs from the last trade war.

Since 2020, China’s government has been suspending various tariffs it imposed on US imports, and those waivers all expire Friday. So far, the government hasn’t said it would extend them, while it previously announced extensions in advance. (…)

“In the medium term, it’s also likely China will find new markets for its exports — although this may be met with resistance from partners in the rest of the world, already concerned about Chinese overcapacity in some sectors,” Cousin wrote in a note on Friday.

Such pushback is already becoming apparent. Over the past week, both South Korea and Vietnam followed in Washington’s footsteps and slapped tariffs on Chinese steel products to halt surging supplies from the world’s biggest producer of the metal. (…)

• US and UK in talks on trade deal that could spare Britain from tariffs
• Trump’s Tariff Onslaught Is Coming Faster Than His Team Can Carry It Out Administration officials are privately indicating that the full reciprocal action will take longer than April timeline to implement

(…) All those announcements are creating a bottleneck at the Office of the U.S. Trade Representative and the Commerce Department, which are in charge of implementing the tariffs, according to people familiar with the dynamics, prompting a race among staff to implement the president’s orders on an accelerated timeline.

So far, only the China tariffs are in place—largely because the administration viewed them as low-hanging fruit with little impact on U.S. consumers, according to people with knowledge of policy discussions. (…)

Administration officials are privately indicating that the full reciprocal action will take longer than the April timeline to implement—up to six months or even more, according to people familiar with the discussions. While there will likely be a reciprocal announcement on April 2, that time frame is simply too small to fully analyze the tariffs and nontrade barriers of all those nations, the people said. (…)

The completion date of other pending actions, such as a tariff investigation into copper launched this week, is unclear. Likewise for Trump’s planned duties on lumber imports, which he has previewed for sometime in April though he hasn’t specified an exact date. (…)

Privately, some administration officials are indicating that the reciprocal trade action likely won’t result in huge tariff increases on most nations—partially because many of those nations have relatively low tariffs, and because trading partners will try to negotiate them downward.

More trade actions are still expected, adding to the implementation bottleneck. Those are likely to be slapped on specific industries, a list likely to expand in the run-up to April 2, according to people familiar with the matter. In addition to the tariffs already announced, duties on critical minerals and products that contain them are under consideration, the people said. 

The administration’s patchwork of tariffs comes in lieu of imposing the across-the-board tariffs that Trump promised on the campaign trail. Once in office, administration members decided that combining reciprocal trade action with sectoral tariffs would be more legally defensible than a universal tariff order, said people with knowledge of the discussions, and that it would inflict less collateral damage on U.S. consumers and the stock market while still covering major swaths of the economy with tariffs.

Sectoral duties—such as the pending actions on steel, aluminum and copper—might be announced on April 2, but they are likely to be imposed under the national-security authority in Section 232 of the Trade Expansion Act. That law requires a notice and comment period, typically 30 days. The steel and aluminum tariffs are an exception because they will be imposed under an existing tariff investigation. (…)

• Canada’s Export Agency Sees Skyrocketing Interest in Trade Diversification as Tariffs Loom Inquiries have gone from around 40,000 to 1 million

(…) “We’re seeing more general thoughts around ‘How do I start to protect myself, my business going forward.’” (…) The government agency, which has been operation since 1944, offers expertise in capital, risk management, trade knowledge and has global connections. (…)

“The Canada brand writ large has a lot of value,” Winterhalt said, pointing to areas such as food security and the value of Canadian standards, energy, critical minerals and clean technologies. “Canada’s the envy of the world in many respects. And the ability to trade in those products I think is a huge asset to Canada and one that will only grow over time.”

Trump’s Tariff Threats Draw Growing Consumer Backlash

(…) The latest data point comes from a Harris Poll taken for Bloomberg News. It found that almost 60% of US adults expect Trump’s tariffs will lead to higher prices and that 44% believe the levies are likely to be bad for the US economy, compared to 31% who say they’d be a boost. (See the full story here.)

That’s not an isolated result. Multiple consumer confidence measures and retail sales numbers all point to a growing concern among shoppers, who account for some two-thirds of US gross domestic product.

There also have been warnings from companies like Walmart and Ford about the impact tariffs will have on their operations and sales. Trump’s tariffs are preoccupying the nation’s biggest companies. The topic has come up a record 700 times during quarterly earnings calls for S&P 500 companies, according to a Bloomberg News analysis of transcripts.

Trump and his aides are, of course, staying on message. His nominee to lead his Council of Economic Advisers, Stephen Miran, told senators today that there was no reason to be concerned about the economic impact of tariffs. In fact, he told a confirmation hearing: “There’s nothing in the historical record that would say that it’s impossible to have a fabulous economy with high tariffs.”

That’s true. If you look way back in US history. What Miran was referring to was the 19th century, when the US economy looked very different than it does now.

Today’s consumers don’t appear to buy the president’s message on tariffs. For now, at least, Trump’s threats are only making them nervous. Which isn’t good for the US economy.

But, that’s not true! From my Fear post on January 6:

(…) The Tariff Act of 1890, commonly called the McKinley Tariff, became law on October 1, 1890. The tariff raised the average duty on imports from 38% to 49.5%. (…)

The Tariff Act was a major topic of fierce debate in the 1890 Congressional elections. The tariff was not well received by Americans who suffered a steep increase in prices. The 1890 tariff was also poorly received abroad. Protectionists in the British Empire used it to argue for tariff retaliation and imperial trade preference.

Inflation was particularly high on what the NYT called “necessaries” such as farm products (+6-8%), textiles (+4%), metals and metal products (+6%), building materials (+5%) and “miscellaneous” (+11%) per BLS research.

In the 1890 election, Republicans lost their majority in the House with their number of seats reduced from 171 to 88.

In the 1892 presidential election, Harrison was soundly defeated by Grover Cleveland, and the Senate, House, and Presidency were all under Democratic control. Lawmakers immediately started drafting new tariff legislation, and in 1894, the Wilson-Gorman Tariff passed, which lowered US tariff averages.

Trump’s contention that the 1890s were “probably the wealthiest ever because it was a system of tariffs” also does not verify. (…)

After exploding 70% between 1885 and April 1890, the U.S. equity markets became very volatile, losing 16% in the following 7 month before roaring back 33% until the end of 1892.

The Depression of 1893 was one of the worst in American history with the unemployment rate exceeding ten percent for half a decade. Equities lost 25% in the first 7 months of 1893, back to their mid 1886 level.

The National Bureau of Economic Research estimates that the economic contraction began in January 1893 and continued until June 1894. The economy then grew until December 1895, but it was then hit by a second recession that lasted until June 1897.

Estimates of annual real gross national product (which adjust for this period’s deflation) are fairly crude, but they generally suggest that real GNP fell about 4% from 1892 to 1893 and another 6% from 1893 to 1894. By 1895 the economy had grown past its earlier peak, but GDP fell about 2.5% from 1895 to 1896. During this period population grew at about 2% per year, so real GNP per person didn’t surpass its 1892 level until 1899.

The McKinley Tariff rose the average duty on imports by 10.5pp, from 38% to 49.5%. Wells Fargo calculates that tariff announcements so far increase the U.S. trade-weighted tariff rate 6.5pp, from 3.9% to 10.4%.

Also not quite true are growing concerns among shoppers per recent consumer confidence measures.

Yes, as Wells Fargo wrote

February brought the biggest drop in consumer confidence since 2021 as anxiety about the outlook for the broader economy manifested in a more-than nine point drop in the forward-looking expectation index, which now sits at an eight-month low and is just 7.3 points from its cycle low in 2022.

The Conference Board’s measure of consumer confidence corroborated a theme evident in the separately reported sentiment survey from the University of Michigan: consumers are apprehensive.

But the index fell mainly because of dropping Expectations. Measures of Present Situation held up.

And Expectations rose for Republicans and declined for Democrats and Independents. Not very telling, is it?

It’s Xi Jinping’s World, and Trump Is Just Living in It As Donald Trump blows up the rules-based order, China is pulling ahead in the global battle for ideas.

Very interesting essay by Daniel Ten Kate, Bloomberg’s Executive Editor for Asia Economy and Government.

Some excerpts but well worth reading in its entirity:

(…) Four years on, with Donald Trump back in the White House, the back-and-forth almost looks quaint. Blinken’s talk of a “rules-based order” has been replaced with a doctrine of “America first” and “peace through strength.” Trump has threatened friends and foes alike with tariffs, pushed to somehow acquire Greenland and the Gaza Strip, and called Ukrainian President Volodymyr Zelenskiy — who has spent the past three years fighting off an invasion by Vladimir Putin’s Russia — a “dictator.”

[Yesterday: “Did I say that? I can’t believe I said that. Next question,” Trump said.]

“It’s really peace through strength,” Trump said last week. “Because without the strength it’s going to be very hard to have peace.”

Trump has also questioned the very essence of the rule of law, declaring on social media that “He who saves his Country does not violate any Law” — a quote often attributed to Napoleon Bonaparte. (…)

Trump’s understanding of power — demanding fealty and showing he is prepared to use coercion to achieve his aims — is arguably more in line with China’s vision of the world than any US president since the establishment of the UN in the wake of World War II. That shift is putting Chinese President Xi Jinping ahead in the global battle of ideas.

In China, all politicians, soldiers, judges, bureaucrats and business titans answer to the Communist Party, a form of control that will be on display next week at the annual gathering of China’s legislature, the National People’s Congress. Xi’s government has spent billions creating an Orwellian surveillance state to monitor citizens and snuff out dissent before it can threaten the Party. Laws serve as tools to maintain power, and access to China’s market of 1.4 billion consumers is wielded as a weapon to achieve geopolitical aims.

But whereas Xi flexes every bit of state muscle to ensure no one can challenge the Party’s power, Trump is using all levers of American economic and military might to keep the US ahead of China as the world’s preeminent superpower. While that strategy may prove successful in the short term, in the long run his actions are creating a world much more aligned with China’s interests. (…)

During trade talks in Trump’s first term, he attempted to force Xi into submission with demands for changes to several Chinese laws, including those related to intellectual property protections and forced technology transfers. Nationalists in China were outraged, and at one point compared Xi’s top trade negotiator to a Qing dynasty official who in 1895 signed the Treaty of Shimonoseki with Japan. That agreement remains a source of national shame because it obligated China to open more ports to foreign trade and to cede territory, including Taiwan.

Xi ended up resisting Trump’s demands, and the US president eventually settled for what was termed a “Phase One” trade deal largely tied to purchases of US agricultural goods ahead of the 2020 election. Then came Covid-19, tanking US-China ties and ultimately Trump’s chances at victory. (…)

But over the past few years, the relationship between the Party and China’s citizens has been strained. A slumping property market, a crackdown on the private sector and weak consumer spending have put the country on pace for the longest streak of deflation since the 1960s, helping to knock China off its trajectory of overtaking the US as the world’s biggest economy by 2030.

The one bright spot has been exports. Xi has cranked up China’s manufacturing machine to historic levels to buoy growth and dominate emerging industries like electric cars, batteries and solar panels. But Trump’s tariffs threaten that strategy, and other nations may follow suit to stop Chinese exports flooding the world. (…)

For Xi, a healthy industrial sector is also key to producing weapons and energy. Solar panels and batteries, for instance, could reduce reliance on imported fossil fuels if the US and its allies ever attempt to cut off supplies in any war over Taiwan — long the biggest flashpoint between the US and China. (…)

In China’s eyes, Trump is simply more honest than other administrations about America’s desire for hegemony.

The US has a long history of ignoring international rules that conflict with its strategic interests, a version of American exceptionalism that Chinese officials regularly criticize. Even so, the US has at least been able to argue that its rule-breaking was necessary for some greater good, that it was only trying to protect democracy against authoritarianism, keep the world safe from terrorists or quickly end a war that would otherwise kill many more people.

With Trump, even the pretension of moral authority is out the window. His United States is one where Ukraine provoked Russia into war, where European lawmakers are a bigger security threat than Russia and China, where alliances are protection rackets, where sovereignty is negotiable and where nearly any oppression of the weak can be justified in the name of national interest.

All of that fits with China’s strategic interests, including its opposition to formal military alliances, restrictions on civil liberties in the name of national security and territorial claims in the South China Sea, Taiwan and elsewhere on its periphery. (…)

Although Trump’s wrecking ball to global norms may deal some short-term blows to China, particularly on trade, ultimately he’s ushering in a much more comfortable world for the Communist Party. Trump’s threats of military and economic coercion to acquire Greenland, for example, provide Xi with a less bloody model to assert control over Taiwan than Putin’s invasion of Ukraine.

And in the overall contest for power, Xi has one major advantage over Trump: At 71, the Chinese leader is seven years younger, and he never needs to face an election.

That effectively means Xi can wait out Trump until the pendulum swings back again in the US. When it does, whoever takes over may find that “Chinese-style democracy” is the norm and “the rules-based order” has fundamentally changed, perhaps forever.

The Robots Are Coming!

Unitree Robots That Dance, Fight Earn Founder Beijing’s Acclaim DeepSeek of China’s robotics sector wants to monetize its tech

When Chinese President Xi Jinping gathered two dozen of the nation’s business leaders for a summit last week, one of the surprise attendees was a little-known, 34-year-old robot pioneer.

Wang Xingxing, chief executive officer of Unitree Robotics, was seated in the first row in front of Xi, more central than celebrated founders such as Alibaba Group Holding Ltd.’s Jack Ma and Tencent Holdings Ltd.’s Pony Ma. The country’s state media showered him with attention after the summit, which included a coveted handshake with the president.

Wang — whose startup makes robots agile enough to dance, work and perform kung fu — is having a moment. Beyond the Xi summit, Unitree was featured in a Carnegie Mellon University research project on robots that perform like Lebron James and other top athletes. Meta Platforms Inc. is discussing cooperating with the company, Bloomberg News reported. And Unitree machines joined humans for a dance extravaganza on one of China’s most prestigious programs, the official CCTV’s Super Bowl-like Lunar New Year special in late January.

Wang has said humanoid robots are evolving faster than even he expected, and such products may become widely deployed in service and manufacturing sectors by 2026 or 2027. (…)

Wang and his team have pulled off technological breakthroughs at relatively low cost — with parallels to DeepSeek’s bombshell earlier this year — raising the potential for China to field throngs of robots for industrial, commercial and even military use. (…)

“The U.S. military is exploring ways to incorporate humanoids into modern warfare, but China has already deployed armed robotics to the battlefield. If the U.S. falls further behind in such critical technology, our troops will face fatal disadvantages on the battlefield.”

In response to requests for comment, Unitree said, “Our products are made for civilian use and we don’t engage in any uses of our products for military purposes.” It also pointed to a joint statement from 2022 in which firms including Unitree and Boston Dynamics Inc. pledged not to weaponize their robots. (…)

Unitree now envisions making emerging gadgets and affordable, intelligent robots for homes, factories, and academic institutions. (…)

Its latest G1 humanoid features a price tag of $16,000 on its official website, versus the potential $20,000 to $30,000 Elon Musk may ask for Tesla’s Optimus robot in the future. (…)

Dinner is SERV’d

Serve Robotics (NASDAQ:SERV) is a new AI name coming out of Silicon Valley looking to re-shape the food delivery business. By implementing automation into deliveries through a fleet of self-driving, environment-friendly robots, Serve is slowly moving into more markets across the United States. The company already has a strong footprint in Los Angeles and last week announced a partnership with several fast-food chains in Miami that will begin utilizing Serve’s delivery robots.