CONSUMER WATCH

Consumer spending increased again in July, but a gap is widening between lower- and higher-income households.

Total credit and debit card spending per household increased 1.8% year-over-year (YoY) in July, the highest YoY rate of growth since January, and up from the 0.2% (YoY) increase in June, according to Bank of America aggregated card data. Seasonally adjusted (SA) spending per household rose by 0.6% month-over-month (MoM), following a 0.4% MoM increase in June.

Looking at the data in more detail, the rise in MoM total card spending in July was fairly broad based, with both retail and services contributing, and services spending reversing after three months of declines. The 0.9% MoM services increase was the largest since April 2024.

Does this rise in spending mean that the weakening we saw in April and May is largely behind us? Perhaps, but there are reasons to be cautious on that view.

First, retail spending in July appears to have been boosted by online promotions by numerous retailers, such as ‘Prime Day,’ which lasted longer than in 2024. This resulted in stronger online retail spending this year compared to the year prior.

Back-to-school (BTS) spending also appears to have picked up in July, following a slow start in June. In our view, strength in spending in both of these areas does not necessarily say much about the underlying momentum of the consumer going forward, as this spending is, by nature, temporary and “event driven,” and could reverse in subsequent months.

Another reason for caution: the spending gains may reflect some impact from tariffs. For one, it is possible some of the increase in spending was due to retailers passing through current or prospective tariff increases onto customers. When we look at the number of card transactions per household in July, we see a smaller rise than in dollar terms. Additionally, the August 1st deadline for countries to reach trade deals with the US may have also encouraged some consumers to “buy ahead” to avoid future price rises. (…)

Looking at Bank of America deposit data, we see a YoY rise in the number of households receiving unemployment payments. Higher- and middle-income households are seeing the biggest increases/growth, with the YoY increase in unemployment payments for both cohorts around 10% in July. Lower-income households, however, are seeing comparatively small YoY increases, around 4% YoY. Although, it is important to note that the absolute numbers of households receiving unemployment payments is low across all income cohorts.

Yet, we also see wage gaps widening. Bank of America deposit data shows that the three-month moving average of after-tax wage growth for lower-income households decelerated in July to 1.3% YoY from 1.6% YoY in June.

By contrast, higher-income households’ wage growth accelerated for the third month in a row to 3.2% YoY from 2.9% YoY in June. The gap between higher- and lower-income wage growth is the highest since February 2021. So, from this perspective, the labor market appears to have deteriorated most significantly for lower-income workers.

In our view, lower-income households may not be seeing a large rise in unemployment payments in part because their wage growth is weakening. In other words, they may not be losing their jobs, but soft labor demand is pressuring their pay and they are potentially working fewer hours.

Furthermore, the stark divergence in wage growth is increasingly reflected in card spending. In July, card spending was flat among lower-income households. But it was much stronger for middle- and higher-income households, with YoY growth accelerating to 1.0% and 1.8%, respectively.

From a macroeconomic perspective, it is reassuring that middle- and higher-income households’ spending growth does not appear to weakening like it has for lower-income households. It is worth noting that the lowest 30% of households by income account for less than 15% of overall US consumer spending. So, if spending among those who earn more continues to look solid, the outlook for overall consumer spending should also be robust. (…)

While lower-income households’ wage and spending growth is clearly a weak point, consumers’ overall financial health looks sound. Bank of America deposit data shows that households continue to hold more in both nominal and inflation-adjusted terms than in 2019. Moreover, across all households, including lower-income ones, the rate of decline of deposits has eased.

The latest data on credit card “borrowing capacity” also looks solid. For example, we continue to see that the share of households who carry a credit card balance from one month to the next (“revolvers”) is lower than in 2019 across income cohorts.

Among those that carry a balance, there is, however, some sign of the increasing pressure on some lower-income households. In particular, the median credit card utilization rate for this group has risen faster than that of middle- and higher-income households since 2019.

However, there is an important caveat: monthly credit card balances are not high relative to after-tax wages and salaries compared to 2019 – thanks in part to previous strong wage growth across income cohorts in recent years. (…)

Trump Fed Nominee Brings Ally on Tariffs, Rates

(…) Many Fed officials are worried that tariffs will weaken the economy while raising prices, creating a difficult trade-off between cutting rates to support the economy or holding them steady to contain inflation. Miran says this is backward: that the economy will benefit from tariffs with no noticeable impact on prices, allowing the Fed to resume rate cuts it paused at the beginning of the year. (…)

Miran, who has a Ph.D. in economics from Harvard, is currently the head of the White House Council of Economic Advisers. (…)

Miran’s contrarian challenge centers on two main claims: that tariffs won’t meaningfully affect aggregate prices or consumers’ expectations of future inflation, and that Trump’s broader economic policies are “extremely disinflationary.” (…)

Miran last fall suggested that tariffs wouldn’t lead prices of tariffed materials or goods to rise because a stronger dollar would offset some of the impact. That hasn’t happened this year. Instead, the dollar has weakened against foreign currencies.

In a Bloomberg Television interview on Thursday, Miran said there has been “zero macro-economically significant evidence of price pressures” from new trade barriers imposed by Trump. Even if some individual prices rise, the effects would be temporary because services inflation—which dominates the consumer-price index—has been running at modest rates, he said.

So far, those arguments have had little traction inside the Fed, with only two officials—both Trump appointees—concluding that the central bank can cut rates because they think tariff effects will be short-lived. A few other officials, however, have indicated in recent days they could support cutting rates for another reason: They are worried that the labor market may be weakening in a way that would make inflation less worrisome. (…)

Now, with Trump pushing for lower rates, Miran has said he doesn’t think inflation is likely to be a problem. Miran has said his views about trade-offs in managing inflation haven’t changed but that economic policy has, including Trump’s push to cut taxes and deregulate businesses. (…)

Now Trump Wants an Export Tax Want a license to sell chips to China? Better pay the man.

The WSJ Editorial Board:

President Trump views tariffs as a toll that he alone gets to set for access to U.S. markets. Now he’s charging fees on U.S. companies for the purported privilege of exporting artificial-intelligence chips to China. Mark this as another step toward government control of private business.

The Commerce Department imposed restrictions on the sale of Nvidia and Advanced Micro Devices AI chips to China this spring in the name of protecting “national and economic security.” China’s military-civil fusion strategy requires its companies to acquire technologies to advance the government’s military and intelligence capabilities.

Such export controls hurt Nvidia’s business in China, and the chip maker (market cap: $4.4 trillion) lobbied the White House to ease them. Voila, the Administration last month lifted the export restrictions in return for China easing controls on rare earth exports.

“We held it up, and then, in the magnets deal with the Chinese, we told them that we would start to resell them,” said Commerce Secretary Howard Lutnick. Treasury Secretary Scott Bessent said resuming H20 sales was “all part of a mosaic.”

Now we’re seeing the rest of the mosaic, and it’s not pretty. The Administration is demanding a 15% cut on sales of Nvidia’s H20 and AMD’s MI308 chips to China. Want to do business? Pay Paulie. It’s not clear whether the Administration plans to use the cash to pay down the deficit, spend it, or use it for its mooted sovereign wealth fund.

In any case, this is an export tax that Congress didn’t authorize. Will AMD or Nvidia challenge the political extortion in court? Selling chips in China may be more important to them than defending the legal principle that the government can’t willy-nilly shake down companies. (…)

Nvidia argued that the restrictions benefit Beijing’s national chip champion Huawei and would result in China setting global AI standards rather than the U.S. Perhaps. But the Administration earlier insisted it wasn’t using chip controls as leverage in trade talks. Relaxing its curbs in exchange for trade concessions from China and payments from chip makers suggests the Administration’s real priority is deal-making in pursuit of more revenue.

Step by step, Mr. Trump is expanding the long arm of the state into more of the private economy. Will any Republican object? Alas, probably not.

• China Urges Firms Not to Use Nvidia H20 Chips In New Notices

Beijing has urged local companies to avoid using Nvidia Corp.’s H20 processors, particularly for government-related purposes, complicating the chipmaker’s attempts to recoup billions in lost China revenue after the Trump administration reversed an effective US ban on such sales.

Over the past few weeks, Chinese authorities have sent notices to a range of firms discouraging use of the less-advanced semiconductors, people familiar with the matter said, asking not to be named discussing sensitive information. The guidance was particularly strong against the use of H20s for any government or national security-related work by state enterprises or private companies, the people said.

The letters did not, however, constitute an outright ban on H20 use, according to the people. Industry analysts broadly agree that Chinese companies still covet those chips, which perform quite well in certain crucial AI applications. President Donald Trump said Monday that the processor — which he called “obsolete” — “still has a market” in the Asian country. (…)

Beijing asked companies about that dynamic in some of its letters, according to one of the people, posing questions such as why they buy Nvidia H20 chips over local alternatives, whether that’s a necessary choice given domestic options, and whether they’ve found any security issues in the Nvidia hardware. The notices coincide with state media reports that cast doubt on the security and reliability of H20 processors. Chinese regulators have raised those concerns directly with Nvidia, which has repeatedly denied that its chips contain such vulnerabilities.

Right now, the people said, China’s most stringent chip guidance is limited to sensitive applications, a situation that bears similarities to the way Beijing restricted Tesla Inc. vehicles and Apple Inc. iPhones in certain institutions and locations over security concerns. (…)

Nvidia said in a statement that “the H20 is not a military product or for government infrastructure.” China has ample supplies of domestic chips, Nvidia said, and “won’t and never has relied on American chips for government operations.” (…)

Beijing has publicly indicated that the resumed H20 shipments were not part of any bilateral deal. China’s recent notices to companies suggest that the Asian country may not have sought such a concession from Washington in the first place. (…)

The H20 chip has less computational power than Nvidia’s top offerings, but its strong memory bandwidth is quite well suited to the inference stage of AI development, when models recognize patterns and draw conclusions.

That’s made it a desirable product to companies like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. in China, where domestic chip champion Huawei Technologies Co. is struggling to produce enough advanced components to meet market demand. By one estimate from Biden officials — who considered but did not implement controls on H20 sales — losing access to that Nvidia chip would make it three to six times more expensive for Chinese companies to run inference on advanced AI models.

“Beijing appears to be using regulatory uncertainty to create a captive market sufficiently sized to absorb Huawei’s supply, while still allowing purchases of H20s to meet actual demands,” said Lennart Heim, an AI-focused researcher at RAND, of China’s push for companies to avoid American AI chips. “This signals that domestic alternatives remain inadequate even as China pressures foreign suppliers.” (…)

• Trump Open to Nvidia Selling Scaled-Back Blackwell to China

Trump said he would consider a deal that would allow Nvidia to ship its Blackwell chips to China if the company could design it to be less advanced. “It’s possible I’d make a deal” on a “somewhat enhanced — in a negative way — Blackwell” processor, he said in a briefing with reporters. “In other words, take 30% to 50% off of it.” (…)

Trump didn’t say exactly when he might negotiate a deal with Nvidia Chief Executive Officer Jensen Huang on the Blackwell chip but alluded to a possible meeting soon on the prospect: “I think he’s coming to see me again about that, but that will be an unenhanced version of the big one.”

Nvidia’s Blackwell design is at the heart of the most powerful computers that create and run AI software. Those chips are currently too powerful to be sold into China, according to US restrictions. (…)

When the US tightened restrictions in April, Nvidia said it would work on another chip for the China market and would seek permission to export that one. It cautioned that the older Hopper design, the basis of the H20 chip being sent to China only, could no longer be reduced in capabilities.

• Trump’s Tariffs Won’t Solve U.S. Chip-Making Dilemma The proposed semiconductor tariffs—and exemptions—don’t line up with their supposed purpose

President Trump’s chip-tariff regime could disrupt the global electronics trade and send prices of all kinds of goods higher. One thing it appears unlikely to do: bring advanced chip-making roaring back in the U.S.

Trump last week threatened a 100% tariff on “chips and semiconductors,” but offered an exemption. Companies that commit to “build in the U.S.” won’t have to pay the duty, according to Trump.

While vague, that appears logical on its face. If the point of the tariffs is to cajole companies into doing more of their work in the U.S., they ought to get a reprieve when they do that.

One issue is that all of the world’s big chip companies are already investing in U.S. production, encouraged in part by subsidies doled out by the prior administration. Meanwhile, other big technology companies are likely to invest in areas other than advanced chip production to get their own exemptions. (…)

If anything, the incentive will be to make just enough U.S. investment to appease politicians, then import whatever else is needed, especially considering the substantially higher cost of manufacturing in the U.S.

Those higher U.S. costs have been a core issue for foreign chip-makers that the tariffs won’t alleviate. TSMC told investors last month that it expects the higher cost of its U.S. fabrication to weigh down companywide gross margins by 2 to 3 percentage points over the next few years. And those fabs aren’t even first in line for the company’s most expensive and most advanced technology. TSMC’s Arizona facilities are currently producing chips with the company’s N4 process technology—two generations older than the N2 process the company is about to launch in its Taiwan fabs. (…)

TSMC, Samsung and Intel are the only chip makers in the world that can produce at the most technically advanced process nodes. And Intel is struggling for survival—having slashed its workforce and capital spending plans to conserve cash as it tries to catch up to TSMC. Trump’s recent broadside against Intel’s Malaysian-born chief executive adds even more uncertainty to the chip giant’s outlook.

Counterintuitively, chip tariffs might end up having a more dramatic effect on electronics companies that don’t make chips, because they have so much to lose from tariffs on vital imported components. Apple’s tariff exemption—secured through pledges for $600 billion of investments over the next four years—saved the company from costs that could have undermined its U.S. business.

Its peers—at least those with deep pockets—will likely aim for the same tariff-free treatment.

If the goal is to spur investment in U.S. manufacturing generally, this might make sense. But if the aim of chip tariffs was to bring more advanced chip manufacturing to the U.S., these pledges are hardly silver bullets.

Apple’s U.S. investments do support domestic advanced chip-making: The company is the first and largest customer of TSMC’s factory in Arizona and is working with Samsung to devise chip-making technology in Texas, among other efforts. But Apple is also spending big on server manufacturing, expanding its data centers and adding to its campus in Austin, Texas—all activities that have less bearing on the domestic chip industry.

It is also notable that much of what Apple is doing was already in progress before the tariff threat. Chief Executive Tim Cook said in 2022 during a joint press conference with President Joe Biden that Apple would use TSMC’s Arizona chips. Now that Apple has a tariff exemption, the tariffs provide no nudge to do more.

What is more, U.S.-based manufacturing will still come at a premium, and someone will have to cover the price. “The higher cost of tariffs and U.S. production will eventually be shared across U.S. consumers and different parts of the supply chain,” Bernstein Research analysts wrote in a report Thursday.

There remain good reasons for chip makers to expand in the U.S., of course. The companies have tapped grant money under 2022’s Chips Act to increase their U.S. manufacturing. They also have access to tax credits for purchases of chip-making equipment that increased in Trump’s “big, beautiful bill” last month.

Many companies also see value in locating more of their supply chains in the U.S. to avoid the kind of shock they experienced during the Covid-19 pandemic. There is a geopolitical calculation at play, too, that has little to do with tariffs: A more aggressive Chinese posture toward Taiwan, a widening of conflicts in the Middle East, or any number of other potential political disruptions all give companies reasons to want more of their semiconductor supply chain close to home.

Those factors have been, and will continue to be, the main drivers of chip investment in the U.S.—not tariffs.

Donald Trump softens stance on Intel boss after demanding resignation

(…) Trump said he met Intel’s chief executive on Monday afternoon along with commerce secretary Howard Lutnick and Treasury secretary Scott Bessent after the president called on Tan to resign last week, claiming he was “highly conflicted”.

“The meeting was a very interesting one,” Trump wrote. “His success and rise is an amazing story. Mr. Tan and my Cabinet members are going to spend time together, and bring suggestions to me during the next week.”

The company said there had been a “candid and constructive discussion on Intel’s commitment to strengthening US technology and manufacturing leadership”. (…)

Last month Tan warned Intel could back out of the most advanced chipmaking if it is unable to win major clients for its newest so-called 14A manufacturing process.

Its withdrawal would send shockwaves through the global semiconductor industry and leave the US without a domestic alternative to Taiwan Semiconductor Manufacturing Company — a blow to the White House’s efforts to onshore advanced chip manufacturing. (…)

The president’s attack last week came after Tom Cotton, head of the Senate intelligence committee, wrote to the company’s chair expressing concern about the “security and integrity of Intel’s operations” and Tan’s ties to China. (…)

Xi Takes Aim at US ‘Protectionism’ in Phone Call With Lula

Brazilian President Luiz Inacio Lula da Silva spoke with his Chinese counterpart following talks with the leaders of India and Russia, as part of his outreach to allies after Donald Trump thrust Latin America’s biggest economy into the middle of his global trade war.

A readout from Brazil’s government said the two leaders spoke for about one hour and exchanged views on international affairs, including recent developments around the Russia-Ukraine war. Brazil’s president, known universally as Lula, and Chinese leader Xi Jinping also agreed on “upholding multilateralism” through the Group of 20 and BRICS.

During the phone conversation on Tuesday morning in Beijing, Xi called for coordinated efforts against unilateralism and protectionism — language usually used by China to criticize US trade policy. He said China supports the Brazilian people in safeguarding their country’s legitimate rights, describing ties between the two nations as being “at their best in history,” according to Chinese state broadcaster CCTV.

China is willing to work with Brazil to strengthen coordination and set an example of “unity and self-reliance among Global South nations,” CCTV cited Xi as saying.

The call caps an effort by Lula to build solidarity across the BRICS club of major emerging nations, of which Brazil is a founding member along with Russia, China and India. Lula spoke with Russian President Vladimir Putin and Indian Prime Minister Narendra Modi over the past few days, as Brazil came under pressure from the US.

Brazil has become a target of Trump’s trade war after he imposed higher tariffs in an effort to end the trial of former President Jair Bolsonaro on charges that he attempted a coup. Lula’s government has responded by seeking to expand trade with other partners, especially with China, India and Southeast Asia.

Xi’s conversation with Lula also followed Trump’s demand on Monday that China massively step up its purchases of US soybeans. Beijing has bought more of the legume from its top supplier Brazil in recent months, and is also testing trial cargoes of soybean meal from Argentina, to secure supplies of the animal feed ingredient. (…)

BRICS countries are among the nations that were hit the hardest by higher US tariffs that went into effect last week. (…)

Trump has slammed BRICS as being anti-US. The group, established in 2009, expanded last year and now also includes Iran, the United Arab Emirates, Ethiopia and Egypt.

Lula met Xi in May during a state visit to Beijing, where he signed more than 30 agreements for Chinese investment in mining, transport infrastructure and ports, among other deals.

• China Loosens Urea Exports to India in Sign of Thawing Tensions China has eased curbs on urea shipments to India, in the latest indication of a thaw in tensions between Beijing and New Delhi as US President Donald Trump’s trade policies target the two Asian nations.

Not what I think, what I do…

Via John Authers:

The share of global fund managers surveyed by Bank of America Securities who think so has risen to a record 91%:

Fund managers are stepping back into the US, and exiting the euro zone:

The natural corollary is that the risk of overheating should rise. But in a bizarre conjunction, fund managers think both that inflation will rise, and that rates will fall:

Further — and this is extraordinary — most of BofA’s respondents believe the next Fed chair will resort to quantitative easing or yield curve control, desperate expedients that are hard to justify outside the hardest of landings:

How to square this circle? Investors are grasping that fiscal dominance, or financial repression, is the order of the day. The US debt burden takes priority, taxes won’t be hiked to fix it, and so people will be forced to lend to the government for cheap (as happens with QE). Shareholders have to put up with the government muscling in on their share of the action, as with the cut of China sales that chipmakers are paying.

FYI:

Data: U.S. Census Bureau. Chart: Axios Visuals

I spent last week in Alaska, like Mary Daly, the San Fran Fed president (AK is part of the SF Fed district). In a Bloomberg interview she boasted that Alaska is a leading indicator for the US economy. Really?

Alaska’s economy since 2020 grew only 0.4% annually. Its high dependence on oil is a crude contrast with the US diminishing sensitivity to oil production (declining) but critical sensitivity to lower oil prices, a key part of Trump’s policies of hiking tariffs while keeping gasoline prices as low as possible for the people.

Trump will also visit Anchorage this Friday, not to participate in the state’s annual fair that week, but to try, again, to sway Putin towards peace with Ukraine something he was supposed to do in 24 hours.

Why Anchorage, a rather bland city, with square, dull, almost soviet-style buildings? Quite unlike the rest of Alaska where nature needs nothing else to impress.

Probably because the Alaskan capital is almost at the same distance from Moscow than from D.C., even though Alaska is but 53 miles from Russia. The flights are as long as the odds of success. Hopefully, they will avoid the fair’s “Demolition Derby” scheduled for 6:00pm on Friday.

But maybe also to celebrate the US purchase of Alaska from Russia for $7.2 million in 1867, a total Trump-style steal. Then Secretary of State William H. Seward’s deal, initially dubbed “Seward’s folly”, turned out a real bargain, especially after the 1896 discovery of gold in Yukon that triggered the Klondike Gold Rush.

That was nothing compared to the 1968 discovery of the Prudhoe Bay Oil Field, the largest conventional oil field discovered in North America that still holds some 25 billion barrels of oil.

Trump may also smartly remind Putin that the US got such a bargain because Russia was nearly bankrupted by the Crimean War (1853-1856) and desperately needed cash. How ironic!

Alaskans may take the opportunity to tell Trump that Alaska’s trade balance is positive thanks to its exports of seafood and metal ores to Japan, China and South Korea, its most important clients.

They might also mention that Alaska relies on imports from Canada for its critical needs of steel and aluminum products, now all subject to super high tariffs because of Canada “flooding” the US with fentanyl.

And, in passing, inform Trump of the recently approved large expansion of the port of Anchorage, “probably the biggest infrastructure project that the state of Alaska has ever seen since maybe the Trans-Alaska pipeline”. All imported steel stuff, including the 3 enormous cranes that can only come from Japan or China.

Who will absorb the 50% additional costs?

Meanwhile last week, economic news kept confounding most pundits, be they positive or negative, which may explain why equity markets reached new highs even with historically high uncertainty.

The S&P 500 Index rose 2.4%, while the Nasdaq Composite climbed 3.9%. The Russell 2000 small capitalization index gained 2.4% last week.

Earnings continued to beat expectations while potentially negative economic stats were simply received as precursors for lower interest rates by September and beyond. The 452 companies that have reported so far showed earnings up 12.4% on revenues up 6.2%. Strong revenues with exploding margins!

Yet, the economic background is not great. Trump’s firing of the BLS chief did not simply erase the stats indicating slower employment.

Initial jobless claims last week increased from 219K to 226K in the week to August 2. Continuing claims, for their part, rose to a near 45-month high of 1,974K. Not much firing but little rehiring as well. Unemployment benefits last 26 weeks…

Goldman Sachs reckons that US growth is near stall speed, reminding us that rising unemployment tends to feed on itself. It estimates that underlying job growth was only 28k in July.

Goldman says that US GDP grew at a below-potential annualized pace of 1.2% in the first half of the year, and expects growth of 1.1% annualized in 2025H2. “Our Fed call remains at three consecutive 25bp cuts in September, October, and December (followed by two more in 2026H1).”

The expected 125bp Fed cuts (-30%) assume that the growth slowdown is not accompanied, or caused, by higher inflation from tariffs.

With last week’s announcements, the average effective US tariff rate has hit 18.3% per Yale’s Budget Lab, the highest level since the Great Depression. Yale’s economists estimate a 1.5% increase in consumer prices (after substitutions with full pass-through) and a potential $2,000 annual hit to the average household.

If so, the hit to households and to inflation would be quite enough to negatively impact the economy, even if only “transitory” by economist speak, which means that the first year increase in inflation does not repeat. But in consumer speak, price increases carry on.

So far, so good the optimists say. But that may also prove only transitory. Goldman’s calculations are that

US consumers had absorbed 22% of tariff costs through June but that their share will rise to 67% if the recent tariffs follow the same pattern as the earliest ones. This implies that US businesses have absorbed more than half of the tariff costs so far but that their share will fall to less than 10%. This net impact on US businesses masks that some companies have absorbed a larger share of tariff costs, while some domestic producers shielded from import competition have raised their own prices and benefited.

Our analysis implies that tariff effects have boosted the core PCE price level by 0.20% so far. We expect another 0.16% impact in July, followed by an additional 0.5% from August through December. This would leave core PCE inflation at 3.2% year-over-year in December, assuming that the underlying inflation trend net of tariff effects is 2.4%.

So, Goldman sees a 0.8% hit to core inflation (67% pass through) but consumers’ purchasing power will shrink more due to the 3.3% additional inflation on food. Yale’s 1.5% hit to Americans’ budgets seems more likely.

Trump finalized his tariff scorecard last week. But does anybody care anymore? The largest customer of the world hikes access costs by 18.3% and investors yawn, even rejoice. So what? Taxes are cut, oil prices are low and Americans are wealthier than ever.

And not to worry about potential bad news, the stats minions have been warned. So have Powell and friends who will be “welcoming” Stephen Miran in September.

Nobody got fired on these news last week:

• Nonfarm business productivity grew an annualized 2.4% in Q2, more than offsetting the 1.8% decline recorded the previous quarter. On a 12-month basis, productivity was up 1.3%.
• That said, compensation costs rose at a 4.0% annualized pace in Q2. Since this rate outpaced productivity growth by a comfortable margin, unit labour costs increased 1.6% in the quarter. On a 12-month basis, labor costs rose 2.6%. But S&P 500 revenues are up 6.2%. Hence those surprising margins.

Hmmm:

What else happened last week?

Switzerland’s president failed to convince Trump that her country does not deserve 39% tariffs for its chocolate and watches, things the US is not famous for. “Dubai chocolate” will gain in popularity. Laos and Cambodia, poor as they are, could not even find money to even call the Trump team to ask what have they done to merit such treatment?

India got hit hard with 25% additional tariffs, on top of the initial 25%, for buying Russian oil. Indians are probably surprised that their country might be the only buyer of Russian oil. Rumor is that China is gobbling a few barrels as well. Is there something other than Russian oil in play here?

For some time India has been cultivating friendship with everybody and everybody was happy with the apparent neutrality of this huge country nestled in the middle of everywhere.

The so-called Quad group (US, India, Japan and Australia) seemed an appropriate counterweight to the Russia-China-Iran-North Korea axis.

Early in his new mandate, Trump said “the “relationship is the best it’s ever been between two leaders of the two countries,” while Modi called Trump “my dear friend.” Modi went as far as saying “MAGA plus MIGA (Make India…) becomes a mega partnership.”

Another example that partnerships with Trump-USA can be volatile.

So Modi has been trying to restore the relationship with China, recently sending several high-profile officials, including India’s foreign and defense ministers, to China.

Modi  himself “plans to visit China for the first time in seven years and meet with President Xi Jinping on the sidelines of a regional security summit, according to officials in New Delhi. Xu Feihong, China’s ambassador to India, gave Modi moral support over the tariffs on Wednesday, writing on X: “Give the bully an inch, he will take a mile.””

Modi also invited Putin to visit India.

The two leaders spoke to each other on Friday, reviewed bilateral agreements and discussed Russia’s ongoing war on Ukraine, according to a statement from the Indian government. Putin has been invited to attend the India-Russia Annual Summit in India later this year. (…) In the wake of the US tariff announcement, India signed agreements with Russia to deepen cooperation in aerospace science and technology as well in rare earth minerals, aluminum, fertilizers, railway transport and other sectors. (Bloomberg)

It seems that Trump and Modi annoyed each other during the recent skirmish between Pakistan and India which Trump claimed to have stopped.

Modi felt humiliated. His government took the unusual step of publishing the minutes of a call between Trump and Modi, clarifying that “at no point” was there any mediation by the US and that the ceasefire discussions “took place directly between India and Pakistan.” Other Indian pundits were less diplomatic and almost poetic in their outrage over this “typical Trump overreach.”

Trump wasn’t pleased. He was all the more delighted, though, when Pakistan praised his peacemaking prowess and hinted that it would nominate the president for the Nobel Peace Prize he openly covets. Trump then hosted Pakistan’s top military official — whom India considers the mastermind of the recent terrorist attack — for lunch, and Pakistan promptly made the Nobel nomination official. Subsequently, Pakistan also bargained down the new American tariffs on its goods from 29% to 19% — relatively meek next to India’s rate.

None of this means that the US-Indian relationship is irredeemably broken. Trade negotiators are slated to meet again this month, and a deal remains conceivable. Still, Indians have taken note that Trump is cracking down hardest against India, a putative partner, for buying oil from Russia, and not on China, allegedly America’s main adversary, which imports even more Russian oil.

On Truth Social, Trump wrote

I don’t care what India does with Russia. They can take their dead economies down together, for all I care. We have done very little business with India; their Tariffs are too high, among the highest in the World. Likewise, Russia and the USA do almost no business together.

Forget Russia; India’s economy is growing 6-7% per year. A 50% tariff on Indian products could put a drag of a total 0.6pp on its GDP per Goldman Sachs.

Maybe Trump will broker another truce in coming days but the episode can only tilt India more towards China and Russia. That’s almost 1.5 billion people. Remember Vietnam? The US justified its military intervention in Vietnam by the domino theory, which stated that if one country fell under the influence of Communism, the surrounding countries would inevitably follow. The aim was to prevent Communist domination of South-East Asia.

America may find itself home alone, excluding itself from a free-trade zone in the rest of the world, and boycotted from ensuing negotiations triggered by nations believing that the US can now implement tariffs on any country, at any time, for any reason, disregarding any preexisting treaties or handshake agreements. (Hubert Marleau)

On July 28:

The president appeared before reporters at Trump International Golf Links near Aberdeen, Scotland, where he and his sons, Donald Trump Jr. and Eric Trump, opened a new golf course on Tuesday.

“I look forward to playing it today. We’ll play it very quickly. And then I go back to D.C., and we put out fires all over the world,” Trump said before cutting the ribbon opening the new course in the village of Balmedie on Scotland’s northern coast.

I wish Mark Twain was still alive…

Also last week:

• “On a country-by-country basis, the [US] goods deficit narrowed with China from $14.0 billion to a an all-time low of $9.4 billion), Mexico (from $17.1 billion to $16.3 billion), Canada (from $2.2 billion to a 56-month low of $1.3 billion), Germany (from $6.8 billion to a 59-month low of $4.0 billion) and Italy (from $2.6 billion to a 61-month low of $1.6 billion).” (NBF) That’s a 10.1B aggregate swing in one month. Imports are back on trend, not so for exports.

• The Trump administration is seeking more than $1 billion from the University of California at Los Angeles in exchange for releasing $584 million in federal research funding that the US froze last week. The $1 billion proposal dwarfs the settlements agreed to by Columbia and Brown, two private universities that have inked deals with Trump, and is higher than the administration’s reported $500 million floor for a settlement with Harvard University. UCLA is the first public university to enter talks with the administration over frozen funds.

What If the US Isn’t the World’s Most Innovative Country?

(…) Looked at through this sports prism, the innovation landscape is simple. The US is still far ahead. America is responsible for almost all the breakthrough technologies that define the current era (AI, smart phones, social networks) just as it was responsible for all the breakthrough technologies that defined the last era (PCs, the internet, semiconductors). Three of the world’s most consequential AI companies — OpenAI Inc., Anthropic PBC and Databricks Inc. — are headquartered within two miles of each other in San Francisco. Nvidia Corp. is so dominant in the market for high-end chips that one commentator remarks that “there’s a war going on in AI out there, and Nvidia is the only arms dealer.”

Yet China is breathing down America’s neck — and in some areas, such as surveillance and hypersonic rockets, it’s taking the lead. The most cited paper on AI, known as the ResNet paper, was written by four Chinese scholars who have never studied outside the country. More than 1,300 foreign companies have opened advanced scientific research labs in China to tap into the country’s growing talent pool. And Europe? The combined value of all the tech companies on the continent is far less than the value of just one US company, Microsoft Corp. (…)

The US might be good at breakthrough innovation in the private sector. But what about incremental innovation in the public sector? Feed in different measures, and you get different results.

If you focus on the dissemination of new ideas rather than their invention, China is arguably well ahead of the US. It is well documented that China excels as a fast follower thanks to its combination of engineering prowess and work ethic. China has twice as many miles of high-speed rail than any other country. BYD Co. Ltd sold nearly 607,000 EVs in the second quarter of this year compared with Tesla’s 384,000. SZ DJI Technology Co. Ltd sells more commercial drones than everyone else combined.

But today the country is doing something more exciting — taking ideas that exist in laboratories and commercializing them before anybody else. Beijing and Shanghai have hundreds of driverless taxis roaming the streets. Giant companies such as Alibaba Group Holding Ltd. and Baidu Inc. are best understood as innovation-and-execution machines. If America still leads the world in inventing the future, China leads in bringing it to life.

But focus on the public sector rather than the private sector, and a different innovation champion emerges: Singapore. Most countries count themselves as winners in the government-reform stakes if they can digitalize regular government functions. The government of Singapore conducts all its interactions with its citizens online but goes much further than this. It uses sensors in the streets to monitor and direct the flow of traffic, drones to survey areas affected by the outbreak of disease, and motion sensors in public housing to monitor the wellbeing of the elderly.

The government has a collective brain — the Smart Nation and Digital Government Group (SNDGG) — that attracts the country’s most brilliant citizens and regards itself as a public-sector equivalent of Google. If most countries contract out high-tech operations to the private sector, Singapore keeps them in-house to develop unique competences; if most governments play catch up, SNDGG acts as a pace setter.

Private sector-obsessed Americans might be inclined to treat Singapore’s excellence at government as a mere side-show to the real innovation race. But when the great political theorist Thomas Hobbes asked himself what it was that prevented life from being solitary, poor, nasty, brutish and short, he answered that it was the state, or Leviathan, rather than the East India Company.

(…) Germany excels in what might be called “deep” or “incremental” innovation: Its strength lies in middle-sized companies — the celebrated mittelstand — that produce highly specialized products and focus all their energies on making sure they are the best in the world. These companies, which are usually hidden away in small towns, are so focused on engineering excellence that they have little time for PR: Herrenknecht AG is easily the world’s most impressive tunneling company but has only attracted a fraction of the attention of Elon Musk’s cleverly-named The Boring Company.

Switzerland combines a similar enthusiasm for mittelstand companies with a genius for big public projects such as the Swiss railway system, surely one of the wonders of the world, the Large Hadron Collider, and CERN (the European Organization for Nuclear Research). Thanks to CERN, the world’s first web site was not a dot-com or a dot-net but a dot-ch, which stands for Confederatio Helvetica, Switzerland’s Latin name.

Can the case for Europe be extended any further than a few isolated areas of excellence? The classic argument for the European model is that it is much more sustainable than the American one — that it pays attention to things like sustainability and quality of life not just to billion-dollar exits.

What is the point of leading the world in AI if that AI is used to sell more cat food or get more clicks on cat videos? Some of these questions are even beginning to trouble people at the very heart of US tech: A recent book by Alex Karp, the chief executive officer of Palantir and Nicholas Zamiska, the company’s legal counsel, The Technological Republic, argues that the US innovation machine has focused too much on fripperies like delivery Apps and not enough on big ideas that will transform society. (…)

Today:

Trump Bid for Cut of Nvidia, AMD Revenue Risks ‘Dangerous World’

Even in an administration that has repeatedly pushed the legal limits of using economic statecraft to reshape the global business landscape, a new deal with two tech giants is raising alarm bells among trade experts.

Nvidia Corp. and Advanced Micro Devices Inc. agreed to pay the US government 15% of revenue from some chip sales to China. The chips — Nvidia’s H20 AI accelerator and AMD’s MI308 chips — were earlier banned by the Trump administration and require export licenses to sell.

“To call this unusual or unprecedented would be a staggering understatement,” said Stephen Olson, a former US trade negotiator now with the Singapore-based ISEAS – Yusof Ishak Institute. “What we are seeing is in effect the monetization of US trade policy in which US companies must pay the US government for permission to export. If that’s the case, we’ve entered into a new and dangerous world.”

The chip-payment arrangement is the latest legally questionable, heavy-handed government intervention into business since US President Donald Trump returned to the Oval Office in January. Along with his chaotic tariff campaign and persistent criticism of a sitting Federal Reserve chairman, Trump has used his Truth Social platform for everything from calling on CEOs to resign to offering commentary on corporate advertising campaigns.

Trump’s transactional policy approach saw him approve the sale of United States Steel Corp. to Japan’s Nippon Steel Corp. in a $14.1 billion deal that included caveats such as agreeing to US national security rules and a “golden share” for the US government. Japan, South Korea and the European Union all pledged to invest billions in the US, helping secure tariff rates of 15%, while companies such as Apple Inc. have also skirted levies by promising to invest hundreds of billions of dollars.

The Nvidia and AMD revenue-sharing deals may now prompt the White House to target other industries and goods, according to Deborah Elms, head of trade policy at the Hinrich Foundation in Singapore.

“The sky is the limit,” she said. “You could come up with all sorts of company-specific, country-specific combinations that would say, ‘No one else can trade, but if you pay us directly, then you get the ability to trade.’”

Although Nvidia and AMD agreed to the terms, there are questions about the legality of the agreement, Elms said. The arrangement looks like an export tax, which is forbidden by the US Constitution.

The Trump administration is already in the midst of a lawsuit related to his use of the International Emergency Economic Powers Act to levy what he called “reciprocal” tariffs on the world. On Friday, Trump warned of a “GREAT DEPRESSION” if US courts ruled that his tariffs were illegal.

Chips are at the heart of the US-China battle to dominate industries of the future such as AI and automation. The Biden administration restricted the sale of advanced chips to China, prompting Nvidia to develop the H20, which skirted such restrictions. Trump administration officials tightened export controls in April by barring Nvidia from selling the chips without a permit.

Last month, however, the White House decided to allow Nvidia and AMD to resume sales of chips designed specifically for the Chinese market, which are several rungs below the most advanced artificial intelligence accelerators. Commerce Secretary Howard Lutnick said the administration wanted Chinese developers “addicted” to American technology.

China has grown increasingly hostile to the idea of Chinese firms deploying the H20, particularly after the US called for the chips to be installed with tracking technology to better enforce export controls. Yuyuantantian, a social media account affiliated with state-run China Central Television that regularly signals Beijing’s thinking about trade, on Sunday slammed the chip’s supposed security vulnerabilities and inefficiency.

Still, Chinese companies could use the H20s because domestic firms can’t produce enough AI chips to meet demand. That potentially provides an opportunity for Nvidia and AMD to sell more — and now for the US government to earn additional revenue as well.

Trump has yet to extend a 90-day trade truce between the US and China, which is set to expire on Aug. 12. Lutnick said last week that the detente was “likely” to continue as the world’s biggest economies continue to engage in talks ahead of a possible meeting between Trump and Chinese President Xi Jinping later this year.

“There’s clearly a shift by the administration to take a lighter national security stance as these negotiations are ongoing,” said Drew DeLong, lead in geopolitical dynamics practice at Kearney, a global strategy and management consulting firm.

While the US has intervened before, including by taking stakes in private companies after the 2008 financial crisis, a similar deal like the one struck with Nvidia and AMD is hard to remember and — without proper oversight — could lead to a “crony capitalism state,” according to Scott Kennedy, senior adviser at the Center for Strategic and International Studies in Washington.

“It represents a huge shift in the way the American economy is supposed to operate,” Kennedy said. “It won’t make anyone happy except maybe the Chinese, who will get their chips and watch the US political system go through gyration and domestic tensions.”

Small US Firms Paying Trump Tariffs Face $202 Billion Annual Hit

Small US companies, the source of more than half of the country’s job creation in recent years, are struggling to comply with President Donald Trump’s new tariffs and cope with growing financial strains clobbering them from higher import costs.

Last week’s country-specific levies varying from 10% to 50% landed with a one-two punch: additional red tape issued by Customs and Border Protection, and a need to increase customs bonds — guarantees that companies must buy from surety providers to ensure the government receives its tariff revenue, other taxes and any potential penalties.

Big firms often have in-house resources to handle such administrative changes and costs, but compliance and forecasting in the new tariff regime are “where the smaller companies are really struggling,” said Erin Williamson, vice president of US customs brokerage at Levallois-Perret, France-based Geodis, a leading global logistics firm.

“They may not have that internal compliance group or the infrastructure to really sit back and say, ‘OK, this is going to be the impact to us. How do we pivot?’” Williamson said in an interview Friday.

The US Chamber of Commerce estimated this month that the country has about 236,000 small-business importers — those with fewer than 500 employees. The goods they bought from abroad were worth more than $868 billion in 2023.

Based on an estimate before Trump’s duties took effect Aug. 7, the combined annual tariff hit to those companies is $202 billion, according to the chamber, the nation’s largest business lobbying group. That works out to about $856,000 per firm a year. (…)

“Small businesses especially are grappling with the ability to stay in business,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a statement last week. (…)

• Small businesses raise prices as Trump’s tariffs hit Main Street

Businesses surveyed by the Financial Times in the Midwestern city of St Louis said their suppliers had hiked prices for a broad range of products in recent weeks, sometimes by as much as 30 per cent, leaving them with little choice but to pass the increases on to customers.

Many said they had stockpiled products priced at the pre-tariff level before the levies came into force, but have since run these stocks down. (…)

“We’re seeing an average 10 per cent increase in the retail price.” (…)

A small business optimism index released last month by the National Federation of Independent Business showed 32 per cent of companies plan to increase prices, the highest reading since March last year.

A census bureau survey in late July had a similar result, with 34 per cent of businesses expecting increased prices in the next six months, up from 29 per cent in mid-July. (…)

Small businesses employ 46 per cent of American workers, or about 59mn people, and account for 44 per cent of the country’s GDP. (…)

“I’ve been in business for 20 years and I’ve never dealt with anything like this in terms of price uncertainty,” Breckle said.

He compared the situation to the Great Recession of 2007-9 and the Covid-19 pandemic. “But this one we’ve created ourselves,” he said.

Builder China South City Ordered to Liquidate by Hong Kong Court

Developer China South City Holdings Ltd. was ordered to liquidate by Hong Kong’s High Court, making it the biggest Chinese builder by assets to be wound up since China Evergrande Group.

The ruling from Judge Linda Chan came after the liquidation petitioner asked for an immediate wind-up order. China South City asked the court for “one final chance,” but Chan said that no significant progress had been made on the company’s restructuring proposal.

The liquidation order shows how China’s years-long property crisis continues to shake one-time giants of the real estate industry. Despite government efforts to prop up the ailing sector, home sales are still weak, making any near-term recovery unlikely. Even UBS Group AG, which had been among the few firms predicting a recovery, is now expecting a delay unless Beijing introduces additional stimulus measures. (…)