Retail Sales Good Not Great in July

There are a few things that take some of the shine off the headline reading, but overall the latest data are consistent with a consumer that keeps spending. A big part of the strength in July spending can be traced to auto sales, which rose 1.6% during the month. In looking through autos, sales were up a more modest 0.3%.

Higher prices are also at play given retail sales are reported nominally, or not adjusted for inflation. Overall goods prices were flat in August, but higher prices for heavily-imported items like household furnishings and recreational goods lifted core goods prices and make sales at some retailers look stronger than underlying volumes likely were last month.

Specifically, we take the larger 1.4% gain in sales at furniture stores and 0.8% gain in sales at sporting goods stores with a grain of salt expecting some of this is simply reflecting higher prices paid for these products during the month. Building material stores may have been even weaker to the extent prices moved up during the month. This works the other way as well—gas sales were likely stronger than implied by the 0.7% gain, given a drop in prices at the pump last month.

In cutting through some of the noise, control group sales which exclude autos, gas, building materials and restaurant sales rose a trend-line 0.5% in July and the 0.5% gain in June was revised up to 0.8% suggesting a decent start to Q3 goods spending.

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

Some of the control group sales strength stems from the 0.8% gain at nonstore retailers, or online sales. July captures Amazon’s Prime-day sales event, which was four rather than the traditional two-days this year. It’s not just Amazon either as other big box retailers have also grown accustomed to running big sales alongside the prime event leading to a spurt of activity during the month. The Census Bureau accounts for this by making seasonal adjustments to the data in an attempt to smooth through annual patterns in sales. (…)

We’ve highlighted the weakness in broad discretionary services, and the 0.4% decline in restaurant sales isn’t exactly a good sign for July services spending, though this series has been volatile month-to-month.

Something less appreciated is the fact that discretionary goods purchases have slipped in each of the three months of Q2 after a tariff-induced pop in March.

The recent downward revisions to job growth help make some more sense of the recent weakness in spending as households have grown more unsure about their job prospects and continue to be worried about tariff-induced price pressure. Ultimately, higher consumer prices could lead to a firmer retail trend in coming months, but we remain cautious on the trajectory of underlying sales volume headed into the second half of the year.

Maybe not great, but very good rather than only good. Retail inflation is picking up: +0.8% YoY, highest since September 2023 but Americans keep spending merrily thanks to payroll growth in the 4.5-5.0% range.

Growth in payrolls averaged 4.3% annualized in the last 3 months, up from 3.8% in the previous 3 months. But the composition has changed from 25% coming from employment growth to only 6% in the last 3 months.

Weird thought: employment growth stalls but consumers keep spending from steady wages and savings while inflation slowly eats up their purchasing power. Should the Fed stimulate now, not really knowing how things will shape up?

INFLATION WATCH

Friday we also got import prices for July.

• Prices for core imports advanced 0.3% MoM in July, following a decrease of 0.1% in June.
• Import prices for nonfuel industrial supplies and materials increased 1.0% in July, the largest monthly advance since a 1.2-percent rise in February. Higher prices for finished nonmetals (boxes, belting, glass, etc.) and major nonferrous metals-crude more than offset lower prices for nonmonetary gold.
• Prices for the major finished goods import categories were mostly up in July. Import prices for consumer goods increased 0.4%, the largest 1-month rise since February 2024. Higher prices for apparel, footwear, and household goods contributed to the July advance.
• The price index for automotive vehicles decreased 0.2%, the largest monthly decline since the index dropped 0.2% in November 2024. The July decrease was led by lower prices for passenger cars, new and used.
• Import capital goods prices increased 0.1% in July.

By country of origin (July MoM):

• Canada: 0.6%
• EU: 1.0%
• UK: 1.5%
• Mexico: 0.8%
• Japan: 0.5%
• China: 0.2%
• ASEAN: 0.3%

FYI: BLS does not include tariffs in estimates derived for the U.S. Import and Export Price Indexes.

Fed’s Bostic Gets Earful on Tariff Costs, Consumer Pain on Tour

Raphael Bostic had two key takeaways from a recent tour through a stretch of the southeast US overseen by the Federal Reserve Bank of Atlanta — consumers are growing more stressed, and tariff costs are real.

In conversations with bankers, educators and business owners based in northern Alabama and Mississippi, Bostic, who is president of the Atlanta Fed, also heard about the burden of higher borrowing costs squeezing businesses’ profit margins and making it harder for families to buy a home. Employer struggles to find and retain workers was another refrain. (…)

“Today, I think my strategic approach would be ‘move and wait,’” Bostic said during an interview Thursday in Red Bay, Alabama. “It might be that it will take some time for the economy to evolve after a move that we do, in ways that make clear sort of what the next step would need to be.”

(…) Bostic did hear repeatedly about the strain businesses and households are facing from elevated costs and higher interest rates, and the ways tariffs are adding to those burdens. (…)

Stories like that reminded Bostic that the new import duties are working their way through the economy. “Tariff costs are actually real costs,” he said. While many firms have absorbed some of the shock to shield consumers, “they don’t think they can do that forever,” said Bostic. “And time is getting short.” (…)

“We’re seeing the consumer stressed,” said John Ramage, executive vice president of Troy Bank & Trust, which has seen some people who were previously current on their loans now making payments 15 days late — and those who were 15 days late now falling one month behind.

“Prices went up and their wages didn’t,” Ramage explained. (…)

Bostic said he still doesn’t have a clear view on whether the price effects from tariffs are more likely to be a passing, or persistent, phenomenon. But he’s watching the policies and data to see where the economy is going to settle, and is prepared to adjust policy accordingly.

“I see the world today as having a lot of different possible outcomes,” Bostic said. “I don’t think I have enough confidence about the probabilities assigned to the specific outcomes to feel like we can move definitively in one direction.”

European Trade Takes Fresh Tariff Hit as U.S. Exports Slump Exports to the U.S. continue to slow sharply, declining by 10% on year in June

Exports to the U.S. from the 27 nations that make up the European Union dropped 10% on year in June to hit their lowest level since the end of 2023, at a little over 40 billion euros ($46.8 billion,) according to figures released Monday by statistics agency Eurostat. The bloc’s overall trade surplus shrank to just 1.8 billion euros, down from 12.7 billion euros a month earlier.

June’s fall comes after EU exports to its largest external trading partner decreased sharply in April, having surged to a record high of nearly 72 billion euros in March, when American importers stockpiled goods ahead of the Trump administration’s impending tariff announcements. At the end of July, Brussels and Washington reached an agreement that will see a 15% baseline tariff placed on EU imports to the U.S. Elements of that deal remain under negotiation; a joint statement detailing the agreement should be achieved “soon,” EU spokesperson Olof Gill said last week. (…)

Compared with a month earlier, June’s shrinking surplus was driven in particular by weaker exports of chemicals, an important export sector for many European economies. Germany, long Europe’s industrial powerhouse and one of the world’s top exporting nations, has seen exports to America slide in recent months, weighing on output at its factories and limiting growth in the wider economy. A strong euro is also paring demand for European goods. (…)

European exports to China, another important market, meanwhile also fell sharply on year, highlighting the broader negative effects of the chillier global trade backdrop. (…)

Narendra Modi vows ‘self-reliant India’ in wake of Donald Trump’s 50% tariff Prime minister unveils plans for tax and regulatory reforms to benefit business

Indian Prime Minister Narendra Modi has vowed to build a “self-reliant India” and announced tax and regulatory reforms to benefit businesspeople and the middle class in his first major speech since the US imposed 50 per cent tariffs on the country.

Modi did not make direct reference to the falling out with the US, but his speech on Friday at Delhi’s Red Fort to mark the country’s 78th anniversary of independence from Britain was heavy on nationalist rhetoric as he pledged to insulate the economy against its reliance on imports ranging from microchips to engines for fighter jets.

“I want to tell our citizens, our youth, and everyone who understands the power of technology, that by the end of this year, ‘Made in India’ semiconductor chips will be available in the market,” said Modi, who was clad in an orange turban and a scarf in the national colours of orange, white and green. (…)

The rift between India and the US, its largest trading partner, has plunged their expanding strategic partnership into its worst crisis in decades, and has stunned many Indians, rekindling distrust of the US and the west in a country that has a long-standing friendship with Russia. (…)

Modi on Friday announced the creation of a dedicated “task force for next generation reforms” to be charged with cutting compliance costs for companies and entrepreneurs, reducing the scope for arbitrary legal actions, and streamlining laws to improve the ease of doing business.

China’s Top Rival to Tesla Bot Headlines Robot Games in Beijing Unitree machines raced and boxed in latest showcase of Chinese robotics

Unitree Robotics brought the spotlight-grabbing machines at Beijing’s set piece robots competition on Friday, burnishing its reputation as a national champion for China’s ambitions in developing AI and humanoids.

The Hangzhou-based company’s H1 robot won gold in a 1,500-meter humanoid race with a listed time of 6 minutes and 35 seconds, beating the average mile time on Strava by close to four minutes. Another Unitree machine also made it to the podium in a race that highlighted day one of the World Humanoid Robot Games.

The three-day event hosted in the Chinese capital is the latest showcase for the nation’s challengers to Tesla Inc. and other US companies developing products in the emerging field of advanced robotics. While Tesla’s Optimus humanoid is still largely just a promise in development, Unitree’s alternatives showed off various athletic feats, adding to Chinese steps forward that included a half-marathon race in April. (…)

In a boxing ring set up at the center of the National Speed Skating Oval arena, contestants from local universities pit Unitree’s G1 models against each other. The robots, distinguishable by colored headbands and gloves, wowed the audience with their kicks and swings. (…)

Hundreds more robots also joined the event on Friday. Beyond the main stage, there were demonstrations like a machine arm playing table tennis and robots on wheels shooting hoops. (…)

Meanwhile, China’s housing problem does not get any better:

New property sales, starts, and completions dropped 8%, 15.4% and 29.2%, respectively, from year-ago levels. The decline in property FAI widened from 12.9% yoy in June to 17.1% yoy in July.

Although the NBS 70-city new home price index only edged down 2.0% mom annualized after seasonal adjustments, similar to June, the Centaline 6-city existing home price index dropped more meaningfully, suggesting continued sales by holders of multiple apartments in large cities.

Recent relaxation of home purchase restrictions in the outskirts of Beijing and potential SOE purchases of unsold homes (totaling RMB 300bn) reported in the media are unlikely to stop the decline in home prices. (GS)

Source: NBS, Centaline, Beike, Zhuge, Wind, Goldman Sachs Global Investment Research

EARNINGS WATCH

Goldman Sachs:

With the 2Q 2025 earnings season nearly complete, the quarter has been marked by one of the greatest frequency of earnings beats on record. 92% of S&P 500 companies representing 84% of market cap have reported. Of those companies, 60% have beaten consensus EPS forecasts by more than a standard deviation of analyst estimates, the highest rate in our 25 years of data history outside of 2009 and the COVID reopening.

Earnings per share for the aggregate S&P 500 grew by 11% year/year in 2Q 2025, 7 pp higher than what consensus had expected. Coming into the earnings season, analysts estimated a 4% year/year EPS growth rate, which would have represented an 8 pp deceleration relative to the 12% year/year growth reported for 1Q. As we discussed in our earnings preview, analysts had slashed earnings estimates as the equity market tumbled in March and April, setting the low bar that companies easily cleared this reporting season.

The strength of 2Q earnings results was broad based. Not only did a majority of companies beat expectations, but the median stock in the S&P 500 reported EPS growth of 8% year/year in 2Q, a slight acceleration from the 7% growth rate in 1Q. EPS growth was strongest among Info Tech and Comm Services stocks, many of which are exposed to the AI investment cycle, as well as pockets of cyclicals such as Financials and Industrials. Materials, Consumer Staples, and Energy were the only sectors where the median stock posted negative earnings growth this quarter.

While backward-looking 2Q results cleared a low bar set by cautious estimates, forward-looking guidance from corporate managements was also stronger than average. 58% of companies this quarter raised their forward guidance for full-year EPS, twice the 29% rate during the 1Q season. Many companies explicitly communicated that the projected earnings headwind from tariffs would be smaller than previous management estimates (e.g., EMR, KMB, PNR, SOLV), in large part because tariff rates had declined relative to levels announced at the start of the last reporting season.

Mirroring the improvement in guidance, analyst estimate revisions for the second half of 2025 have been unusually positive this quarter. During an average reporting season, analysts lower their forecasts for subsequent quarters as companies report, setting the stage for eventual beats. This season, estimates for aggregate S&P 500 earnings in 3Q and 4Q 2025 have actually moved slightly higher.

However, as a result of the large negative revisions earlier this year and the large 2Q beat, analyst estimates show a sharp deceleration in EPS growth from 11% this quarter to 7% in the second half of this year.

Revisions to 2026 earnings estimates have also been extraordinarily robust. Earnings revisions breadth, which measures the relative frequency of upward vs. downward revisions to year ahead analyst estimates, has risen during the last several weeks to the highest level since mid-2021.

We expect the trajectory of earnings estimates to weaken going forward, but not enough to be a negative catalyst for equity prices. We forecast +7% S&P 500 EPS growth in 2025 and 2026, roughly in line with the consensus for 2025 but below both the top-down and bottom-up consensus in 2026.

However, downward revisions to consensus estimates are the usual pattern. Since 1985, consensus EPS growth estimates have typically been trimmed by about 4% each year, a pattern that, if continued, would reduce the current bottom-up consensus 2026 EPS estimate from $304 close to our current estimate of $280 by the time 2026 earnings are fully reported in early 2027.

One reason for the recent positive surprises and revisions is that margins have remained more resilient than many feared in the face of tariffs. Corporations have continued to message their ability to maintain their margins by negotiating with suppliers, adjusting supply chains, passing through prices to consumers, and cutting other costs. In 2Q 2025, margins for the aggregate S&P 500 declined sequentially by roughly 0.1 pp, while the median stock in the index saw its margins rise by 0.4 pp.

Looking ahead, analysts expect aggregate S&P 500 margins to remain flat in 2H 2025, supported by the strong estimates for the largest companies in the index. In contrast, margins for the median S&P 500 stock are estimated to decline slightly in the second half of the year. (…)

Analysts currently expect 2026 margins to expand dramatically, driving an acceleration in EPS growth next year. While companies remain confident in their ability to mitigate the cost pressures imposed by tariffs, and arithmetically the superior margins of the largest technology companies should continue to boost margins for the aggregate index, we see little reason to expect a large increase in profit margins next year.

Margin estimates for companies outside of the S&P 500 look even more vulnerable. Mid-caps and small-caps generally have lower margins than large-caps, but analyst expect those margins to increase in 2H 2025 and 2026.

Dollar weakness has provided a tailwind to large-cap revenues. On a constant currency basis, both real and nominal sales growth for the S&P 500 decelerated in 2Q 2025. Going forward, our economists’ forecasts suggest further downside risk to real demand, but a coincident increase in prices should help support nominal revenue growth. Sales growth appears more at risk for mid- and small-cap companies, which enjoy less of a tailwind from dollar weakness and have already experienced negative real sales growth in 1H 2025. (…)

The Magnificent 7 continued to grow earnings at more than 3x the rate of the rest of the S&P 500. Using consensus estimates for NVDA, which is scheduled to report on August 27, the Magnificent 7 grew EPS by 26% year/year in 2Q, compared with 7% for the remaining 493 stocks in the index. The 19 pp gap compared with a consensus estimate of 14 pp at the beginning of the earnings season.

Going forward, consensus expects a deceleration in Magnificent 7 EPS growth and an acceleration in S&P 493 EPS growth, with projected EPS growth converging by the end of 2026.

However, recent EPS revisions have again pushed the projected growth convergence between the largest technology stocks and the rest of the market further into the future. One year ago, analysts estimated that the 2025 EPS growth gap between the two groups would equal 3 pp, but the gap is currently tracking at 13 pp. Since the start of 2025, analysts have lifted 2026 EPS estimates for the Magnificent 7 by +1% while cutting estimates for the S&P 493 by -4%.

Capex estimates for the Magnificent 7 have been lifted even more sharply than earnings estimates. Since the start of the quarter, analysts have increased their estimates for Magnificent 7 capex by 12% for 2025 and 29% for 2026. The Magnificent 7 are now expected to spend $385 billion on capex this year and $461 billion in 2026.

(…) the median stock in the S&P 500 increased its growth investment spending by 4% year/year during 2Q. On an aggregate basis, the S&P 500 grew capex spending by 24% year/year and lifted R&D by 10%, but decreased buybacks by 1%, while buybacks for the median stock were flat.

US Corporate Bond Spreads Sink to 27-Year Low as ‘FOMO’ Sets In

The extra yield that investors receive for owning investment-grade corporate bonds instead of Treasuries shrunk to just 73 basis points Friday, the lowest since 1998, according to Bloomberg index data.

The drop indicates that the bonds have grown unusually pricey as investors move to lock in current interest-rates despite the risks to businesses posed by the slowing economy and US trade war. Bond traders are betting that the Fed will follow suit, cutting rates as soon as next month after recent economic releases showed inflation was largely in line with expectations and the labor market weakened. (…)

Callum Thomas:

• Investment Manager Sentiment:  Similar thing in the Investment Manager survey; risk appetite and near-term market outlook have dropped back to quite pessimistic levels. The key causes for concern are valuations, politics, and macro. The only bright spot in the survey is earnings.

Source:  Investment Manager Index

• The Real Earnings Yield:  …is Real Low.

Adjusting the CAPE earnings yield for market based inflation expectations shows the real earnings yield at levels where we have seen the emergence of major market volatility in the past (e.g. 1997 prior to the Asian financial crisis, 2000 at the peak of the dot com bubble, 2021 stimulus bubble peak). Different this time?

Source:  Topdown Charts

FYI: the chart below shows that the situation today is surprisingly similar to the IT bubble in the 1990s. (Apollo)

Sources: Bloomberg, Apollo Chief Economist

Worth your time:

Barron’s Senior Writer Tae Kim and Andrew Freedman, communications and software analyst at Hedgeye, unpack the implications for companies such as Alphabet, Meta, Nvidia, and Figma, in a conversation with Barron’s Senior Managing Editor Lauren Rublin.

https://www.barrons.com/podcasts/barrons-live/what-next-for-tech-stocks/FA0C6EBA-5FCC-4AD6-B885-00055583A5BD

BTW: The US also has a food trade deficit:

After five decades of large agricultural trade surpluses, “the U.S. agricultural trade deficit hit a record high in the first half of 2025… [continuing] a historic reversal for the US agricultural sector.” (Bloomberg) (via Bruce Mehlman)

Also from Bruce Mehlman:

• While “it’s the economy, stupid” for Presidential elections, for midterm elections “it’s the President’s approval, stupid.” Midterm outcomes correlate far more closely with Presidential approval than any economic data. (Mehlman Consulting analysis).

The Economist:

Since his inauguration, YouGov has asked respondents whether they approve or disapprove of the job Mr Trump is doing as president. Subtracting the share who disapprove from the share who approve gives us the president’s “net approval”.

Most presidents since polling began have started their terms with positive net approval. Both Mr Trump’s terms began with mixed reviews, and he spent almost his entire first term with a negative score. His second may be following a similar trajectory. It took less than two months for his approval rating to fall below zero, where it has remained ever since. His current net approval rating is -12.

Mr Trump was re-elected on a wave of economic pessimism, telling voters that “incomes will skyrocket, inflation will vanish completely, jobs will come roaring back and the middle class will prosper like never, ever before” during his second term. So far they have been disappointed. Ratings of his handling of the economy and inflation were net positive shortly after his inauguration. They have since fallen to strongly negative in the wake of his declarations of trade war and the ensuing response of investors. YouGov’s data also suggest Americans now disapprove of his handling of immigration, another issue central to his re-election.

Mr Trump’s voters still overwhelmingly approve of his performance as president. But the projection also shows how dissatisfaction with Mr Trump is widespread even in states that voted for him just a few months ago. The numbers will make anxious reading for Republicans facing competitive races in next year’s midterm elections.

INFLATION WATCH

“You can’t handle the truth!” (A Few Good Men)

“In psychology, denialism is a person’s choice to deny reality as a way to avoid believing in a uncomfortable truth. Denialism is an essentially irrational human behavior that withholds the validation of a historical experience or event when a person refuses to accept an empirically verifiable reality.”

• S&P 500 Keeps Record Momentum Alive Despite Strong PPI Data
• One Inflation Gauge Just Rose at the Fastest Rate in Three Years Wholesale inflation jumped to a recent high, likely pushing up Fed’s preferred price metric
• PPI Well Above Expectations in July (Goldman Sachs)
• Hot PPI Inflation (Ed Yardeni)

Hot indeed.

Prices charged by U.S. manufacturers and service providers rose by 0.9% month over month in July, the Bureau of Labor Statistics said Thursday, the biggest month-over-month increase since March 2022.

The increase spanned prices of wholesale goods, from food to tires, which jumped by 0.7% from a month earlier. The prices of business-to-business services were up by 1.1% in July versus June.

The data offer insight into price pressures companies themselves are facing months into a tumultuous season of on-again, off-again tariffs. Wholesale prices for computers, household appliances and furniture all climbed. (WSJ)

The data is actually worse than appears. The BLS again!!

• Final demand goods: +0.7% MoM,  +6.1% a.r. last 2 months.
• Final demand core goods: +0.4% MoM, +3.7% a.r. last 2 months.
• Final demand foods: +1.4% MoM, +9.2% a.r. last 2 months.

Let’s hope these are mainly tariff-related, potentially one-offs.

But here’s the bigger problem

The index for final demand services moved up 1.1 percent in July, the largest advance since rising 1.3 percent in March 2022. Over half of the broad-based July increase is attributable to margins for final demand trade services, which jumped 2.0 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services advanced 0.7 percent and 1.0 percent, respectively. (BLS)

Wolf Street has the details:

In another inflation shocker – services again! – the Producer Price Index Final Demand for Services exploded by 1.08% in July from June (+13.8% annualized!), the worst since March 2022 when inflation was peaking (blue in the chart). It was broad based: Prices for services less trade, transportation, and warehousing spiked by 0.69% (8.6% annualized), while prices for transportation and warehousing services spiked by 1.01% (12.8% annualized).

This explosion in services prices caused the “core” PPI Final Demand, which excludes food and energy, to spike by 0.92% month-to-month (+11.6% annualized), the worst since March 2022. And it caused the overall PPI Final Demand to spike by 0.94% (+11.9% annualized), the worst since March 2022, with food prices and energy prices also surging. (…)

The tariffs are percolating through the prices that companies charge each other, but have shown up only in small increments in consumer prices, totally overpowered by the renewed surge of inflation in services, which are not tariffed, which often have little price competition, and where consumers do most of their spending. It’s services inflation at the consumer level that is so hard for the Fed to contain, which is why the Fed fears services inflation so much. (…)

The six-month average continued to accelerate and reached 3.5% annualized in July, the worst since June 2023. (…)

My observations from the CPI out Tuesday:

• Goods deflation seems over. Prices are not exploding but goods are no longer contributing to slowflation. Core goods PPI has been running at 3.7% a.r. since January, twice its 2010-2019 average.

• Services inflation has seriously accelerated since its March low, in spite of slowing wages and low oil prices. Many surveys mentioned tariffs as a source of services inflation. Maybe service providers are more easily passing through their tariff-related cost increases.

• The correlation between services and headline cpi inflation is 88.2% since 1969:

Pretty broad trends, especially since, unlike the CPI, the PPI does not include imports, until it does. 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

Wondering how PPI relates to consumer inflation. Ed Yardeni has the charts:

• Headline inflation:

• Core inflation:

Now We Know Who’s Paying the Tariffs Producer prices surge, and real wages still aren’t rising fast enough.

The WSJ Editorial Board:

(…) The producer-price data get worse the closer you look. Goods and services both experienced substantial inflation, of 0.7% and 1.1% month-on-month respectively. Goods and services related to business investment in particular are becoming pricier, with the cost of manufacturing equipment rising 0.4% in one month and related services 4.5%.

Prices for intermediate goods—components and raw materials—are also on the rise. Prices for materials used in durable-goods manufacturing increased 1.3% in a single month, and components for manufacturing increased 0.4% in the month.

This hasn’t shown up in consumer prices so far because many companies entered the Trump tariff era with large cash reserves or wider margins, so they can absorb these costs for the time being. But these companies can’t do this forever. Meanwhile, cash lost to paying tariffs or paying tariff-induced higher prices isn’t available for reinvestment in the business, or to return to shareholders. (…)

Today’s producer prices tend to become tomorrow’s consumer prices, however, so the Fed may find it has less room to maneuver than many hoped.

All of this poses a political problem for Mr. Trump and Republicans. The President promises voters that foreigners will pay for his tariff policies. These price data caution that the economy may have other ideas. Americans will pay a big chunk of the tariff bill, either directly via higher consumer prices or indirectly via less business investment in productivity growth to increase wages.

The other warning sign for Mr. Trump this week is real earnings data that’s failing to achieve lift-off. Inflation-adjusted average hourly earnings rose 0.1% in July after zero in June, and the 0.4% monthly growth in May and March could be blips instead of a trend. Real average hourly earnings rose only 1.2% over the last 12 months.

Inflation is a broad-based, persistent increase in the general price level. Tariffs in that sense aren’t inflationary unless the Fed accommodates them with over-easy monetary policy. But tariffs do raise prices on tariffed goods, which can mean a one-time surge with some potential downstream effects. (…)

Republicans are in the political danger zone if tariffs cause price increases—one-off or persistent—that aren’t offset by bigger wage gains. Republicans will make the same mistake as the Biden Administration if they keep telling voters everything is fabulous but the evidence at the grocery store or Applebee’s tells them something different.

Also in the WSJ:

(…) Barclays research suggests that inflation hasn’t increased that much partly because the U.S. hasn’t collected tariffs on many goods—for now. In June, just 48% of U.S. imports were actually subject to tariffs, thanks to myriad exemptions, according to the bank’s analysis of U.S. Census Bureau data.

Goods like pharmaceuticals, certain electronics and semiconductors and many imports from Canada and Mexico were exempted from Trump’s so-called reciprocal tariffs. There are also partial exemptions for goods with at least 20% U.S.-made components.

Ultimately, however, the actual rates importers pay are likely to rise in months to come, according to Barclays. Many of the existing loopholes could close. Trump has threatened 250% tariffs on pharmaceuticals and 100% tariffs on semiconductors. The White House has also said that as of later this month, it is suspending the de minimis exemption, which allows duty-free shipments to the U.S. as long as they are valued at $800 or less. (…)

U.S. companies imported more early in the year to get ahead of tariffs, leading to lower imports in the following months. As inventories shrink, imports are likely to rise again. “Its unclear if you can decouple from China that strongly, that quickly,” says Mark Cus, an economist at Barclays.

Barry Roth, who imports used cars from Canada for U.S. dealers, says he imported around 1,000 cars a month on average last year through November. In January, that surged to almost 1,500 as car dealers tried to get ahead of tariffs. Now, as many cars from Canada face 25% levies, he says he is lucky to import 400 vehicles a month.

But as dealers sell down their expanded inventories, they will either have to pay the tariffs or be left with fewer cars to sell. Either way, he says, prices are likely to rise. “It’s not going to happen tomorrow, it’s not going to happen next week, but it will ratchet up,” Roth says.

Meanwhile, more companies say they are increasingly likely to pass tariffs on to their customers in the months ahead. (…)

Weak demand for goods:

The  shipments component of the Cass Freight Index declined 1.8% in July m/m, and fell 1.7% m/m in seasonally adjusted (SA) terms.

• The y/y decline in shipments widened to 6.9% in July, after a 2.4% y/y decline in June.
• Tariffs hit shipments harder in the most recent data, as paybacks began from demand pull-forwards earlier in the year

Freight volumes are experiencing one of the air pockets we’ve warned about in recent months. We expect more to come after a reprieve in Q3. However, tariffs are also raising vehicle prices, and heavy truck makers are reducing production. In 2H’25, NA Class 8 production is set to fall more than 25% from 1H’25.

As the economy is likely to absorb the effects of tariffs over the next several months, our freight demand outlook remains cautious.

• What Declining Cardboard Box Sales Tell Us About the US Economy

A nontraditional economic indicator, sales of the corrugated cardboard used to make the boxes that transport everything from doughnuts to dishwashers are slumping, signaling that retail demand across industries may be due for its own correction in the not-too-distant future.

US box shipments—that is, volumes of empty packaging materials sold to retailers, which in turn use them to ship orders to warehouses, storefronts and Americans’ doorsteps—fell to the lowest second-quarter reading since 2015.

Memphis-based International Paper Co., one of the world’s largest pulp and paper companies, reported a 5% drop in daily US box shipments in the quarter from the same period a year ago, while packaging giant Smurfit Westrock Plc, based in Dublin, saw a 4.5% slide in North American corrugated cardboard volumes, the biggest drop across all of the regions it operates. “If volume picked up in the United States, that would give us more confidence, but we haven’t seen that yet,” Chief Executive Officer Anthony Smurfit said on a recent earnings call. (…)

Organic growth in consumer goods “is just not happening,” says Ryan Fox, a Bloomberg Intelligence analyst. At the grocery store, for instance, Fox says he now sees buy-two-get-two—or even get three—promotions to drive volumes, never a great sign for demand. At the same time, low housing turnover means consumers aren’t buying as many big items like (boxed) refrigerators and loveseats to fill their new spaces, says Adam Josephson, a former sell-side analyst who covered the paper and packaging sector for over a decade before starting his own newsletter. (…)

In short, it’s not looking great out there for box manufacturers. “They are very much hoping that box demand will get better, but it’s just not happening, and they have no control over it,” Josephson says. Across industries, “all the measures I track are pointing in a not-very-good direction.”

• Global Trade Slowdown Coming: FedEx’s stock price is a leading indicator of global trade.

China’s Economy Slows Sharply as Trade War Bites

Production at Chinese factories and mines rose at the slowest rate since November and expanded a worse-than-forecast 5.7% last month from a year earlier, according to data released by the National Bureau of Statistics on Friday, compared with June’s gain of 6.8%.

Retail sales grew 3.7% on year in July, the least this year and down from 4.8% in the previous month. Expansion in fixed-asset investment in the first seven months of the year decelerated to 1.6%, as a contraction in the real estate sector deepened. The urban unemployment rate climbed more than expected to 5.2%. (…)

The disruptions in July, caused by high temperatures, unusually heavy rain and flooding in large swathes of China, added to what’s traditionally a slow season for the economy.

Growth in yuan-denominated new loans contracted for the first time in 20 years in the month, highlighting subdued willingness for borrowing and spending. (…)

Investment in manufacturing, property and infrastructure fell across the board in July, which was “extremely rare,” according to Jacqueline Rong, chief China economist at BNP Paribas SA.

The effort to curb so-called involution drove local governments to “strictly control” new investment in industries suffering from intense competition or having overcapacity concerns, holding back spending in manufacturing, she said. (…)

There are signs the government’s consumer subsidies are also having less impact on boosting demand, as retail sales of household electronics, office supplies and furniture slowed in July from a month ago. Car purchases fell 1.5% from a year earlier, the first drop since the January-February period.

Some local governments ran into a funding shortage for the subsidy program starting from June, before the country’s top economic planning agency allocated more money to them around late July. (…)

Private capital expenditure declined 1.5% in the first seven months from a year ago, the worst reading for the cumulative gauge since September 2020. (…)

• China New-Home Prices Drop as Stimulus Fails to Halt Slide

New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.31% from June, the biggest decline in nine months, National Bureau of Statistics figures showed Friday. Resale home-value slump narrowed to 0.55%, compared with 0.61% in June. (…) All four tier-1 cities saw their existing-home values drop at least 0.9% from a month earlier. Market watchers have pinned recovery hopes on the top cities. But it was actually tier-2 and tier-3 cities where price declines have narrowed, thanks to local authorities rolling out more easing measures. Real estate investment tumbled 12% in the first seven months, marking a new low since the start of the pandemic. (…)

• Swiss Economy Slows Sharply as Tariffs Weigh GDP rose 0.1% in the three months to the end of June, down from 0.8% growth in the first quarter
• Japan’s Economy Records Modest Growth Despite Trade Uncertainty Real gross domestic product increased 0.3% on a quarter-over-quarter basis in the April-June period
• Eurozone Industrial Production Slumps More Than Expected as Tariff Effects Sting
• German Factory Orders Dip as Sluggish International Demand Weighs Factory orders fell 1.0% on month in June, after a 0.8% decline in May
• Ireland’s Economy Contracts as U.S. Front-Running Cools
• Russia’s Central Bank Cuts Key Rate Again as Economy Slows
• Malaysia Warns of Export Slowdown After Economy Grows 4.4%

White House loyalty rating for companies

The West Wing has created a scorecard that rates 553 companies and trade associations on how hard they worked to support and promote President Trump’s “One Big Beautiful Bill,” a senior White House official tells Axios.

Trump works transactionally, and companies have rushed to pay demonstrative homage. Now, senior aides will have data to consult when considering corporate requests. The unusual spreadsheet fits this administration’s proclivity for micromanaging companies and administering loyalty tests.

Factors in the rating include social media posts, press releases, video testimonials, ads, attendance at White House events, and other engagement related to “OB3,” as the megabill is known internally. The organizations’ support is ranked as strong, moderate or low. (…)

The ranking “helps us see who really goes out and helps vs. those who just come in and pay lip service,” the official said. (…)