US Producer Prices Stagnated on Decline in Services Costs

The producer price index was unchanged from a month earlier, after an upwardly revised 0.3% gain in May, according to a Bureau of Labor Statistics report released Wednesday. US wholesale prices rose 2.3% from a year earlier, the least since September.

Excluding food, energy and trade services, the PPI was also flat. It increased 2.5% from June of last year — the smallest annual advance since late 2023.

The latest wholesale price data suggest manufacturers are so far proceeding cautiously on the extent to which they can pass through higher US tariffs to their customers. The data showed wholesaler and retailer margins were little changed in June after surging in May.

Goods prices excluding food and energy rose 0.3%. Energy costs climbed as natural gas for electric power generation jumped the most in three years.

Services costs, however, fell 0.1%. Over half of the decline was due to a 4.1% drop in traveler accommodations services, the BLS said. Airline passenger services slid 2.7%, the biggest drop since May 2024. (…)

Like the CPI report, the PPI data also indicated some tariff-related inflation. Consumer durable goods costs rose 0.4% after a 0.5% gain in the prior month, the biggest back-to-back gain in about three years.

The PPI report showed the costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, edged up. Unprocessed goods prices increased for the first time in four months.

This chart shows goods inflation YoY for PPI and PCE since 1975. I suspect that the decline in oil prices, like in 2015-16, is helping keep retail inflation lower. But PPI inflation is creeping up: +2.7% YoY in June and +3.8% annualized in the last 3 months. Oil prices are up 15% since they bottomed in May.

“The PPI report comes with a clear warning label: “The scope of the CPI includes imports. The PPI excludes imports.” The PCED measure of consumer prices also includes imports. June’s PCED will be reported on July 31. We expect to see it warming up too, from 2.3% to 2.5% y/y, as predicted by the Cleveland Fed’s Inflation Nowcasting model. July is also tracking at 2.5%.” (Ed Yardeni)

A Modest Rise in June Industrial Output

Overall industrial production rose 0.3% in June on the heels of an upward revision that lifted May’s 0.2% headline decline to an unchanged reading for the month. (…)

An expected rebound in utilities output of 2.8% more than offsets a decline of 2.5% in the prior month. Still with just an 11% share of total output, it is not as though the gains in utilities provided a massive lift to the headline.

Rather, the growth came from actual manufacturing. A closer look at the underlying details here reflects offsets across different industries, but on balance a less negative reading in the hard data than the contracting signals from various manufacturing surveys might otherwise suggest. (…)

Factory output rose just 0.1% in June, that exceeded admittedly modest expectations of no change (0.0%). What makes the feat somewhat more impressive is that most of the upward revision to May’s output was in the factory sector. The initially reported May gain of 0.1% now stands at 0.3%, so June’s gain is coming off a higher base.

While it might be tempting to see the awakenings of a manufacturing renaissance spurred on by tariffs, it is both too soon and not quite accurate to say that. Durable goods manufacturing is where you’d look for early indications that levies were stoking output. As it turned out, durable goods production stalled in June. Gains in primary metals and machinery were offset by declines in output of motor vehicles, electrical equipment and appliances, as well as fabricated metals and wood products.

On the non-durable side of manufacturing, declines at textile mills (-1.0%) and plastic and rubber plants (-0.6%) were more than offset by increased output of petroleum (+2.9%).

Trump Likely to Fire Powell Soon, White House Official Says

President Donald Trump is likely to fire Federal Reserve Chair Jerome Powell soon, a White House official said, and discussed the possible move in a meeting with congressional Republicans on Tuesday night.

While the lawmakers voiced support for the move, which would likely roil financial markets and lead to a consequential legal showdown, Trump has not made a final decision and could change his mind, according to the official who requested anonymity to discuss a private conversation. (…)

Trump made the comments in a meeting with GOP lawmakers who voted against cryptocurrency legislation earlier Tuesday. The remarks were first reported by CBS News. (…)

The White House official disputed the notion that Trump would move immediately to remove Powell. (…)

In recent days, Trump and his allies have lambasted Powell over renovations at the Fed’s Washington headquarters, arguing that the work has been plagued by cost overruns and is exorbitantly lavish for a government office building. Trump suggested that the renovation costs were “pretty disgraceful.”

Asked on Tuesday if it was a fireable offense, Trump responded, “I think it sort of is,” but stopped short of saying he planned to push out the Fed chief over the flap.

“I think he’s a total stiff, but the one thing I didn’t see him as is the guy that needed a palace to live in,” Trump said.

Powell has called media reports about the renovations inaccurate. Earlier this week, he made a formal request for the bank’s inspector general to review the renovation.

Powell has also maintained that a president has no legal authority to fire or demote those in leadership positions at the Fed. In April he said, “we’re not removable except for cause.” (…)

Trump Raises Pressure on Powell While Calling Firing ‘Unlikely’

President Donald Trump said he’s not planning to fire Jerome Powell, and still managed to make it sound like a threat.

Trump’s comments capped a hectic few hours that took his pressure campaign against the Federal Reserve chief to a new level — and sent markets into a shortlived nosedive.

He ran the idea of sacking Powell by a receptive group of Republican lawmakers late Tuesday. An aide said Wednesday morning he was likely to follow through. Then the president publicly backpedaled – with a major caveat.

“I don’t rule out anything, but I think it’s highly unlikely, unless he has to leave for fraud,” Trump said Wednesday when asked about axing the Fed chair. (…)

Next up for the beleaguered central bank is the prospect that a trio of Trump aides might visit the renovation site, casting a fresh spotlight on the project. Office of Management and Budget Director Russell Vought, Deputy Chief of Staff James Blair and Federal Housing Finance Agency Director Bill Pulte – one of Powell’s most vociferous critics — are pushing to carry out an ad-hoc investigation of their own.

“His time has come and the president has made clear that he doesn’t want him here,” Pulte told Bloomberg Television on Wednesday, demurring on whether he personally drafted the dismissal letter Trump was said to have waved in front of lawmakers. (…)

“We think Trump is testing the markets to see whether he can fire Powell,” wrote Anna Wong, chief US economist at Bloomberg Economics. “The sharp reaction appears to have convinced him to pull back on the firing rhetoric for now.” (…)

Congressional Republicans were split on the move. “My understanding is he doesn’t have any intention of doing that,” said Senate Majority Leader John Thune. House Speaker Mike Johnson said he wasn’t sure Trump had the power to do so, though referred to the frustration in party ranks by saying “new leadership would be helpful at the Fed.”

Internal GOP tensions may help explain the timing of Trump’s latest salvo against Powell. The president is looking to shift attention away from the saga over the release of documents in the Jeffrey Epstein case — which has sharply divided his base. Trump said Wednesday he had “total” confidence in Attorney General Pam Bondi over the matter, and he’s angrily urged supporters to shift their attention elsewhere. (…)

The president reiterated on Wednesday that whoever gets the job will be expected to deliver lower rates — another potential hammer blow to the central bank’s autonomy, even if Powell escapes firing.

“Fortunately, we get to make a change in the next, what, eight months or so,” Trump said. “I’m only interested in low-interest people.”

• US justice department fires Epstein prosecutor Maurene Comey

Axios:

President Trump lashed out at “PAST supporters” for their continued focus on Jeffrey Epstein. “Let these weaklings continue forward and do the Democrats’ work, don’t even think about talking of our incredible and unprecedented success, because I don’t want their support anymore!” he said on Truth Social. Go deeper.

Japan’s Exports Drop Again as Tariffs Weigh Shipments to the U.S. slid 11.4% from a year earlier in June, highlighting the impact of higher tariffs

Exports fell 0.5% compared with the same period a year earlier, according to the Ministry of Finance on Thursday. That was an improvement from May’s 1.7% drop but well short of an LSEG-compiled forecast for a 0.5% increase.

Japan’s shipments to the U.S. slid 11.4% from a year earlier in June, highlighting the impact of higher tariffs. The reading marked a third straight month of declines after May’s 11.0% fall.

Japan’s trade surplus with the U.S. also shrank 22.9% in June.

“While overall exports are still holding up well, those to the U.S. are plunging and we think soft global demand will result in a further decline over the coming quarters,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics. (…)

That duty, combined with existing levies on cars, steel and aluminum, could easily shave 1% off Japan’s gross domestic product, said Stefan Angrick at Moody’s Analytics.

“At the very least, this would see GDP flatline over 2025 and 2026,” he said. (…)

Thursday’s data suggests that Japanese carmakers are cutting prices to absorb the cost of the 25% auto tariff Trump announced earlier this year. The volume of car exports to the U.S. rose 3.4% from a year earlier in June, but the export value slipped 26.7%. (…)

“Exporters could face declining profits, potentially increasing pressure for cost-cutting and restructuring. If this affects winter bonuses or the 2026 spring wage negotiations, it could weaken the virtuous cycle of wages and prices,” Norinchukin Research’s Minami said.

• Swiss Exports Slip as Frontrunning Fades, Strong Franc Hits Demand Exports to the U.S. were down nearly 30%

Exports decreased 5.3% to 70.1 billion Swiss francs ($87.53 billion) over the quarter, from 74.0 billion francs in the first quarter, Swiss finance-department figures showed Thursday. Exports to the U.S. were down nearly 30%, reversing a sharp increase the previous quarter, when firms rushed to get orders in ahead of the anticipated package of U.S. trade tariffs announced in April by President Trump.

Imports to Switzerland also declined on the quarter, widening its trade surplus a little to 13.4 billion francs.

The swing in exports between the quarters was almost entirely down to the pharmaceutical sector, the department said. That mirrors Ireland, another major European pharma hub, where drug factories saw an increase in production ahead of the April tariff announcement. Swiss pharma exports dropped close to 10% over the period, the data showed. (…)

Exports of Swiss watches to the U.S. slumped 18% last month, highlighting the rockiness of the two countries’ trading relationship. Watchmaker Swatch Group, which produces brands including its namesake as well as high-end timepieces like Omega and Blancpain, said Thursday that it booked a 10% drop in sales over the first six months of the year, a result of fading demand in China. Luxury-goods group Richemont this week similarly reported declining sales in its watch division in recent months.

Trump’s sweeping package of trade tariffs included duties of 31%-32% on Swiss imports, a move that drew an indignant response from the government in Bern. (…)

• EU Exports to U.S. Cool as Trans-Atlantic Trade Faces Tariff Test

Exports to the U.S. from the European Union edged down to 46.2 billion euros, or around $53.6 billion, in May from 47.7 billion euros a month earlier, statistics agency Eurostat said Wednesday. Overall exports fell 0.8%, with the EU’s overall trade surplus rising to 13.4 billion euros.

The EU’s exports to the U.S. fell sharply in April after reaching a record high in March, when American importers stockpiled goods ahead of the Trump administration’s impending tariff announcements. (…)

Trump on Saturday said he would raise tariffs on most goods from the EU to 30% on Aug. 1. Goods are currently subject to a 10% baseline tariff, with car-parts and some metals subject to higher taxes.

A 30% levy would strike at the core of Germany’s export economy, Chancellor Friedrich Merz told German broadcaster ARD on Sunday. (…)

The U.S.-EU relationship accounts for about 30% of global goods trade, according to the European Council. The EU has threatened tariffs on 72 billion euros of U.S. goods including cars, planes and whiskey, should talks collapse. (…)

Much of Europe’s economic growth in the early part of the year came from front-loading of exports. Some of that continues: eurozone non-durable goods production, which includes pharmaceuticals, rose in May at its fastest pace since records began in 1991.

But Trump on Tuesday floated tariffs by the end of July on pharmaceuticals, which have yet to be subject to levies. The threat is particularly acute in some nations. Ireland’s hosting of major medicine manufacturers means around one-third of its total exports went to the U.S. last year.

• U.K. Economy Unexpectedly Slumps to Second Straight Month of Contraction
• Rise in Australian Unemployment Will Force RBA’s Hand Data released Thursday showed Australia’s unemployment rate unexpectedly rose to 4.3% in June, following a second consecutive month of weak hiring.

Carney says US deal that works for Canada isn’t on table yet

• Mexico plans stronger trade collaboration with Canada after Trump tariff threats

Mexican President Claudia Sheinbaum said on Wednesday that she had spoken with Canadian Prime Minister Mark Carney and that the two had agreed to strengthen trade collaboration, particularly in light of the tariffs from U.S. President Donald Trump set to go in effect on August 1.

“We both agreed that the (U.S.-Canada-Mexico) trade agreement needed to be respected, and we shared our experiences about the letter than we received from President Trump,” Sheinbaum said in her daily morning press conference.

Sheinbaum said she and Carney spoke about the strategies both countries were taking to negotiated with the Trump administration ahead of the August 1 deadline.

She added that Carney was set to visit Mexico, but that a date had not been set.

The Mexican leader said she had also met recently with business leaders, including magnate Carlos Slim, whose family controls firms such as telecommunications giant America Movil and conglomerate Grupo Carso, along with representatives from breadmaker Bimbo and steelmakers, regarding the tariffs.

• France Adds Support for Using Most-Potent Trade Tool on US

A French-led charge to deploy the EU’s so-called anti-coercion instrument is backed by more than half a dozen European capitals, according to people familiar with the matter. Several member states are more cautious, while others have yet to express a position, said the people, who spoke on condition of anonymity to discuss private deliberations. (…)

Those measures could include new taxes on US tech giants, for instance, or targeted curbs on US investments in the EU. They could also involve limiting access to certain parts of the EU market or restricting US firms from bidding for public contracts in Europe.

The first-ever use of the ACI would likely provoke an even wider transatlantic trade war, given Trump’s warnings that retaliation against American interests will only invite tougher tactics from his administration.

“In this negotiation, you need to show strength, you need to show force, unity and resolve,” Haddad told Bloomberg Television on Monday.

“We can go further” than the countermeasures announced by the European Commission targeting almost €100 billion ($116 billion) worth of US trade, he said, referring to the ACI.

The commission, which leads on trade matters on behalf of the bloc, has so far said use of the tool is premature as negotiations continue. Commission President Ursula von der Leyen told reporters on Sunday that “the ACI is created for extraordinary situations” and “we are not there yet.”

• Trump Softens Tone on China to Secure Xi Summit, Trade Deal

(…) On Tuesday, the US president said he would be fighting China “in a very friendly fashion.”

In meetings with his staff, Trump is often the least hawkish voice in the room, some of the people said. (…)

Trump’s fluid playbook and his departure from promised hawkish policies have worried policymakers inside his administration as well as outside advisers, the people said. This week only exacerbated concerns that previous US red lines with China are now negotiable.

Allowing Nvidia Corp. to sell its China-focused, less-advanced H20 chip once again — something multiple senior officials had said was not on the table — reversed the administration’s own stated approach of keeping the most critical American technologies out of Beijing’s hands.

Treasury Secretary Scott Bessent last month cited H20 controls as evidence of the administration’s toughness on China when pressed by senators who worried the US could trade advanced semiconductors for the Asian country’s rare-earth minerals.

(…) some Trump officials have privately objected to granting licenses they say will only embolden China’s tech champions, the people said.

Others have argued successfully that allowing Nvidia to compete with Huawei on its own turf is essential to winning the AI race with China. That view, championed by Nvidia Chief Executive Officer Jensen Huang, has gained traction inside the administration, people familiar with the matter said. (…)

In a further effort to ease tensions, US officials are preparing to delay an Aug. 12 deadline when US tariffs on China are set to snap back to 145% after the expiration of a 90-day truce. Bessent signaled in a Bloomberg Television interview this week that the deadline was flexible.

One person familiar with the plans said the tariff truce could be extended another three months. This comes as Trump is rolling out duties for other countries — including key allies — and threatening more actions on industries including pharmaceuticals and semiconductors.

Last week, US Secretary of State Marco Rubio said a summit between Trump and Xi is likely. Rubio, once among the staunchest China hawks in the Senate, said he had a “very constructive and positive” sit-down Friday with Chinese Foreign Minister Wang Yi.

On Wednesday, Trump praised China’s moves to tighten controls on chemicals used to make fentanyl, part of steps taken after the US president imposed a 20% tariff on the nation for facilitating flows of the drug.

“China has been helping out,” Trump told reporters. “I mean, it’s been, it’s been a terrible situation for many years with fentanyl. But since I came here, we’re talking to them, and they’re making big steps.” (…)

Trump’s gentler handling of China is causing a rift among his advisers. Some members of his trade team want to hold a tough line against Beijing and have promised privately that export controls would never be part of trade discussions, people familiar with their deliberations said.

Yet during last month’s trade talks in London, Commerce Secretary Howard Lutnick openly said that recent export controls — officially justified on the basis of national security — were also designed to “annoy” Beijing. And this week, he — along with Bessent and White House AI and Crypto Czar David Sacks — said plainly that allowing some less-advanced Nvidia chip sales to China is indeed part of ongoing trade negotiations.

Made-in-China Chevys for $17,000 Are Winning Fans in Mexico

Uber driver Patricia Gatica looked no further than her nearby Chevrolet dealership for a new car. The mustard yellow Chevy Aveo she chose is small enough to squeeze through the congested streets of Mexico City and it gets a very respectable 48 miles per gallon.

Best of all, with a price tag of about $17,000, the General Motors Co. subcompact is very, very affordable. The secret: The American-branded car sold in Mexico is actually made in China, where cheaper labor and component costs allow companies to churn out less expensive cars. (…)

Right now, her Chinese-made car is only available outside of the US. But with prices starting below $18,000, the Aveo and similar Chevy Onix subcompact sedans show how much cheaper cars can be in a market that welcomes vehicles built in China. In the US, the average new car price has soared to almost $49,000, compared with about $32,000 in Mexico, according to the country’s automotive dealers association, AMDA.

GM’s lowest-cost car in the US, the Chevy Trax, starts at around $5,000 more than an Aveo sold in Mexico — and that’s for a bare bones version; It typically sells for thousands of dollars more with popular options like heated seats and remote ignition.

Washington has promised to shield American automakers from Chinese imports with tariffs — some in place since President Donald Trump’s first administration. But that hasn’t stopped GM, Ford Motor Co. and Stellantis NV — which owns the Chrysler, Jeep and Ram brands — from shipping their own China-made cars to Mexico and other Latin American markets. They’re part of a wave of Chinese car exports in recent years.

About 65% of GM’s sales in Mexico are brought in from China, totaling some 60,942 vehicles in the first half of the year, according to Mexican national statistics bureau Inegi. Overall, Chinese car imports by all brands made up almost one-fifth of total new car sales in Mexico last year, outpacing shipments from the US, Brazil, India and Japan.

The number is probably even higher as some Chinese brands like BYD Co., Geely Automotive Holdings and Guangzhou Automobile Group don’t report their data to Inegi. Mexico became the biggest destination for Chinese cars in the world in the first four months of the year, having overtaken Russia, according to the China Passenger Car Association. (…)

Shrinking profit margins, price wars and overcapacity in China led GM to send more of its production to other markets like Mexico, helping to grow sales and play into Beijing’s broader export push.

The carmaker’s sales of China-made vehicles in Mexico have accelerated over the past eight years. Between 2016 and 2024, they grew nearly 200 times. That resulted in part from a $5 billion investment in 2015 with its state-owned partner SAIC, which was used to create a family of compact models used to boost sales in China and other markets like Mexico. (…)

Protectionism and tariffs are making the US a high price/high cost country.

PBS, NPR Set to Lose Federal Funding as Senate Passes DOGE Cuts

Also, from Axios:

Voice of America — the U.S.-funded broadcaster long trusted to reach audiences inside authoritarian regimes — has gone dark in key regions after the Trump administration gutted its parent agency.

• Chinese state media is moving aggressively to fill the vacuum, expanding broadcasts in Nigeria, Thailand, Indonesia and other countries where VOA once saturated the airwaves, The Wall Street Journal reports.
• In a scathing report this week titled “The Price of Retreat,” Senate Democrats accused Trump of damaging America’s diplomatic toolkit and failing to offer “a viable alternative” to counter Chinese propaganda.

A new Pew Research poll of 25 countries found that China — not the U.S. — is now viewed as the world’s leading economic power.

• China’s favorability in most countries polled by Pew has ticked upward, while America’s global favorability has diminished significantly since Trump took office.

Never Fully Beaten, Inflation Is Coming Back to Life Just in time for a rates showdown between Trump and the Federal Reserve. (John Authers)

(…) Much remains unclear, and there is plenty to argue about, but the data taken in the large make it impossible for the Federal Reserve to cut rates without a clear improvement. (…)

Tariffs would raise their ugly head most obviously in core goods, excluding food and energy. Reviewing how much this sector contributed to overall inflation, we can say that the problem is still nothing serious, but also that the trend is plainly going in the wrong direction. Core goods inflation had been negative for many years before the post-pandemic spike. Its current rate is the highest in more than a decade, outside of that spike:

Exclude cars, and Omair Sharif of Inflation Insights LLC says core goods prices rose 0.55% in June, the most since November 2021. Tariffs aren’t hurting terribly and the effect may prove transitory, but they are starting to bite. (…)

But a range of measures of underlying inflation watched by the Fed all showed price rises increasing again. This was true of the median and the trimmed mean (excluding outliers and averaging the rest); sticky prices, which are difficult to reduce; and the “supercore” measure of services excluding housing. All are back above the 3% upper bound of the Fed’s target, and all are higher than they had been for decades before the spike (with the exception of the trimmed mean, which was briefly higher when oil prices were at an all-time high in 2008).

The direction of travel matters, and it’s going the wrong way:

None of this proves that tariffs are going to create another price spike. It does, however, suggest that progress on inflation has ended, without ever getting back to theFed’s target. And when it comes to the cost of living for the working class, the issue that dominated last year’s presidential election, the trend is again moving in the wrong direction. (…)

Wells Fargo:

More signs of tariffs percolating into consumer prices were evident in June. Core goods prices rose 0.20% compared to an average monthly increase of 0.07% the prior six months. The pickup came despite further declines in both new and used vehicle prices as auto sales have struggled in the wake of a pre-tariff rush of purchases.

Excluding vehicles, core goods prices rose 0.54%—the strongest monthly increase since early 2022. Price gains were widespread, with household furnishings (+1.0%), apparel (+0.4%), motor vehicle parts (+0.6%), recreational items (+0.8%) and other goods (+0.3%) standing out.

Core services rose 0.25% in June, a touch softer than its trend over the past six months (+0.27%). Prices for travel services fell for the fifth consecutive month, as hotel prices plummeted 2.9% and airline fares slipped 0.1%. The continued slide in these components is illustrative of a pullback in discretionary spending and points to weakening pricing power among service providers.

On the other hand, non-discretionary services inflation strengthened, including a 0.5% increase in medical services prices. Primary shelter inflation modestly firmed, rising 0.3% and leaving the year-over-year rate unchanged at 4.1%.

• Core services without housing jumped by 0.38% in June from May (+4.6% annualized), the worst increase since January. None of these services are tariffed. The six-month average accelerated to 4.2% (red in the chart). So that’s a worrisome development. (Wolf Richter)

Ed Yardeni:

Today’s CPI report for June suggests that consumer price inflation is no longer declining toward the Fed’s 2.0% target. Instead, it might continue to hover around 3.0% for a while as it has recently (chart). Trump’s tariffs may be a contributing factor, though their impact remains debated. The core CPI inflation rate upticked to 2.9% last month, hinting that the core PCED inflation rate (at 2.7% in May) might have followed a similar trend.

The June CPI report reinforces the FOMC’s cautious stance. Although Trump’s tariffs may not yet be significantly driving inflation, they appear to be contributing to inflation stalling at around 3.0%, supporting the FOMC’s hesitation to lower the FFR.

Goldman Sachs:

Based on the details in the CPI report, we estimate that the core PCE price index rose 0.29% in June (vs. our expectation of 0.25% prior to today’s CPI report), corresponding to a year-over-year rate of +2.75%. Additionally, we expect that the headline PCE price index increased 0.32% in June, or increased 2.55% from a year earlier.

In another analysis, Wells Fargo economists support my own:

(…) The downward revisions were not exactly shocking to anyone struggling to reconcile strong spending against the sharp deterioration in various measures of consumer confidence. The lackluster spending has not been limited to just the first quarter. With two months of data now on hand for the second quarter, there is a clear warning sign for consumer spending that has gone largely overlooked: households are reducing their discretionary spending.

Earlier in this cycle, we noted that in more than 60 years, there has never been a recession without real discretionary spending falling on a year-over-year basis. Until recently, the worst that can be said of discretionary spending is that it is growing at a slower pace.

Discretionary purchases slipped in the first quarter, and while we estimate discretionary spending is still up close to 1.5% over the past year through May, that is a full percent lower than its average run-rate last year. A word of caution: some of what looks like “strength” here could simply be a function of pulled-forward demand that lifted spending on some key goods categories late last year before higher tariffs potentially made them more expensive. In short, discretionary goods spending has held up.

Discretionary services spending has not. On a year-over-year basis, discretionary services spending is down 0.3% through May. That is admittedly a modest decline, but what makes it scary is that in 60+ years, this measure has only declined either during or immediately after recessions. (…)

 

Of the eight major spending categories, just three of them account for 63 cents of every dollar spent on discretionary services: food services (the largest, with a 28.1% share), recreational services (19.3%) and transportation (15.7%).

• After accounting for inflation, households are spending just 0.9% more when they go out to eat compared to a year ago. This largest category of discretionary services spending is increasing, but only incrementally.

• Recreational services, which includes money spent on things such as clubs, gym memberships and online streaming services, is holding on by a thread, up just 0.2% year-over-year.

• Transportation spending is falling, down 1.1% over the past year. Within transportation, the places where households are cutting back most include auto maintenance, taxi & ride-sharing, and the biggest decline of all: air travel, down 4.7% over the past year.

The fact that households are putting off auto repair, not taking an Uber and cutting back or eliminating air travel points to stretched household budgets. The largest pullback in discretionary services is stemming from relatively small components: professional services (down 3.1% over the past year) and accommodations (down 1.9%)—but almost all components have slowed on trend, highlighting the broad weakness in services demand today. (…)

Part of reason we have not yet seen price pass-through is because of inventories.

Many businesses and retailers pulled forward demand for product ahead of tariffs. U.S. goods imports jumped over $50 billion adjusted for inflation in December through March as businesses rushed to get goods ashore. This intended stockpiling led inventories to expand $160 billion in the first quarter, and more inventory on hand means firms can mitigate the initial pass through of higher prices stemming from tariffs, particularly if sales slow.

Most estimates suggest it takes about two-to-three months for tariffs to be passed through to consumer prices. Inventories may lengthen that timeline, but they won’t completely offset it. The on-again, off-again approach to tariff policy could also be a mitigating inflation factor in that postponing tariffs can delay the necessary pass-through and even encourage some price absorption by businesses to the extent they view tariffs as a temporary negotiation tactic rather than persistent policy. (…)

Consumer spending is simply not as sturdy as we previously thought it was or even as it was first reported to be. We’ve long held the view that a stable labor market can offset tariff-induced inflation, and that may still be true and would prevent more of a recessionary impulse from ensuing. But consumers have shifted their behavior in the wake of tariffs.

Consumers are undeniably cutting back on discretionary service outlays. On the goods side, spending on key tariff-linked items show a measurable pull-forward followed by an air pocket. Finally, the lack of widespread price impacts has been kept in check by retailers who salted away inventories for just this sort of moment. When pre-tariff inventories have been drawn down, the cost pass-through will be stark.

Tariffs and tight budgets reshape back-to-school shopping

Back-to-school is the second-biggest retail event of the year, after the holidays. This season is a stress test for family budgets and a strategy test for retailers trying to hold onto value-conscious shoppers.

New U.S. tariffs on Chinese imports — including backpacks, pens, binders and shoes — kicked in earlier this year, rose sharply, then came back down to levels still historically high.

• Some retailers stocked up early and “purchased a lot in advance, and some didn’t purchase as much because of the uncertainty,” Deborah Weinswig, CEO of Coresight Research, told Axios.
• “Clients of ours who are in denim or basics brought everything in early. They’ve been warehousing it,” Weinswig said.

67% of back-to-school shoppers had already started buying for the coming school year as of early June, according to the National Retail Federation’s annual survey of nearly 7,600 consumers, released Tuesday.

• This is up from 55% last year and the highest since NRF started tracking early shopping in 2018, the group said.
• 51% of families said they are shopping earlier this year compared with last year “out of concern that prices will rise due to tariffs,” NRF said.
• School supply purchases were up 175% during last week’s Prime Day, Adam Davis, managing director at Wells Fargo Retail Finance, tells Axios, citing Adobe Analytics data.
• Davis says this shows “price-weary consumers were looking to make the most of retail sales.”

NRF said Tuesday that families with students in elementary through high school plan to spend an average of $858.07 on clothing, shoes, school supplies and electronics, down from $874.68 in 2024. Total spending is estimated at $39.4 billion, up from $38.8 billion last year.

The full impact of tariffs hasn’t hit store shelves yet — and back-to-school season may be the first test of how much price pressure shoppers will tolerate, according to a Wells Fargo Investment Institute report released Monday.

• The June Consumer Price Index shows a 3.4% increase in stationary, stationery supplies and gift wrap and a 10.2% price index in college textbooks.

“Retailers have done a solid job front-loading inventory to delay price spikes — so for now, many shelves still reflect pre-tariff costs,” David Warrick, EVP at supply chain risk firm Overhaul, told Axios. “But that buffer may run out by late summer or early fall.”

• “We’re starting to see price creep on everyday items — including school supplies — but the full impact of tariffs will likely cascade in phases,” Warrick said.
• “Many of these categories are caught in the crossfire of the latest tariff expansions, and we’re expecting an average price increase of 12 to 15% across back-to-school essentials,” Warrick added.

Canada: Inflation pressures remain too high in June despite a weakened economy

The latest inflation data aligns broadly with expectations, showing an annual inflation rate of 1.9%. At first glance, this figure is not alarming as it is close to the Bank of Canada’s target of 2.0%. However, when the impact of indirect taxes is removed, which decreased with the abolition of the carbon tax, the consumption basket rose by 2.5%.

This rate is comfortably within the higher band of the Bank of Canada’s target range. The central bank’s preferred core inflation measures, which exclude the most volatile components each month, are increasing at an even faster pace, averaging 3.0%.

Recent momentum shows no signs of slowing, with the three-month annualized change at 3.4% and the monthly change in June at 3.1% (annualized).

Given this morning’s data, it is even more likely that the Bank of Canada will remain on the sidelines in July, especially since private employment is showing signs of recovery, according to the LFS survey in June. (…)

We continue to believe that monetary accommodation will be necessary by the end of the year. Firstly, we remain skeptical about the improvement in the labor market reported by the notoriously volatile LFS survey, despite ongoing tariff uncertainty and other economic indicators suggesting the economy is still in contraction going into Q3.

Furthermore, various measures of wages suggest that current inflationary pressures could ease in the coming months. Finally, rents, which were still rising sharply in June, are also expected to moderate over the next 12 months, as evidenced by the decline in asking prices. Overall, it can take time for economic weaknesses to be reflected in inflation, and this is likely the case at the moment.

New York Factory Activity Expands for First Time in Five Months

The Federal Reserve Bank of New York’s general business conditions index increased 21.5 points to 5.5, data showed Tuesday. Readings above zero indicate expansion. None of the economists in a Bloomberg survey projected growth.

Meanwhile, an index of current prices paid for materials increased more than 9 points to 56. A gauge of prices received retreated nearly a point.

Trump Says Drug Tariffs Probable by Aug. 1, Downplays More Deals

President Donald Trump said he was likely to impose tariffs on pharmaceuticals as soon as the end of the month and that levies on semiconductors could come soon as well, suggesting that those import taxes could hit alongside broad “reciprocal” rates set for implementation on Aug. 1.

“Probably at the end of the month, and we’re going to start off with a low tariff and give the pharmaceutical companies a year or so to build, and then we’re going to make it a very high tariff,” Trump told reporters Tuesday as he returned to Washington after attending an artificial intelligence summit in Pittsburgh.

Trump also said his timeline for implementing tariffs on semiconductors was “similar” and that it was “less complicated” to impose levies on chips, without providing additional detail. (…)

Trump on Tuesday predicted that he could strike “two or three” trade deals with countries before implementing his so-called reciprocal tariffs before they are implemented on Aug. 1, saying that an agreement with India was among the most likely.

Trump told reporters the US was engaged in substantive discussions with between five and six countries, but that he wasn’t necessarily inclined to finalize agreements over simply dictating a tariff rate.

“I would say India, and we have a couple of others, but I have to tell you, for the most part, I’m very happy with the letters,” Trump said.

The president also said that he was likely to impose a standard tariff of “probably a little over 10%” on smaller countries that did not receive tailored rates.

Earlier Tuesday, Trump said representatives from the European Union — which faces a 30% tariff — would be meeting with US negotiators this week. After returning from Pittsburgh, Trump said that while some countries had indicated a willingness to “open” trade after his threats — including South Korea — others, like Japan, had not. (…)

• Trump Tariffs Once Viewed as Punitive Now Win Market Approval

(…) While countries such as India and Vietnam have attempted to negotiate US tariffs of well below 20%, Trump has said he’s eyeing blanket tariffs of 15% to 20% on most trading partners. This suggests the 20% level is no longer perceived as a penalty but rather as a standard in the negotiations. (…)

“So far, equity markets have reacted calmly as the reduction of uncertainty has been viewed positively,” said Rajeev De Mello, a portfolio manager at Gama Asset Management SA. Still, “20% US tariff levels are a worrying evolution, which would lead to a higher effective US tariff than what was expected a few weeks ago,” he said. (…)

Others point to the market’s waning sensitivity to tariff news in general.

“Investor concern over President Trump’s trade war posturing is fading fast, even as he broadens the conflict,” Bank of America strategists including Ritesh Samadhiya in Hong Kong, wrote in a note published Tuesday.

The bank’s latest fund manager survey “captures this growing optimism — a striking 70% of the participants view the potential hit to Asian economies/markets as only slightly negative — marking the most optimistic reading since December,” they wrote.

• Rio Says Trump Tariffs Added $300 Million in Aluminum Costs

Mining giant Rio Tinto Group said US tariffs on its Canada-made aluminum generated gross costs of more than $300 million in the first half, in another sign of how President Donald Trump’s trade agenda is shaking up metals supply chains.

The world’s second-biggest miner is also Canada’s largest aluminum producer, and sells the vast bulk of the metal in the US. Rio said Wednesday it incurred gross costs of $321 million associated with US tariffs on aluminum, but added that a “substantial part” has been clawed back from higher premiums on US sales. (…)

Rio said premiums in the US market — paid on top of exchange prices — rapidly adapted to the initial 25% tariff, but were not fully compensating for the 50% level by the end of the second quarter. (…)

Futures tracking aluminum prices in the US have pointed to higher costs for American buyers, and industry executives have warned the tariffs risk crushing American demand. Earlier this month, beverage maker Constellation Brands Inc. said it expects aluminum tariffs to cost the company about $20 million over the remainder of its fiscal year.

Contracts linked to the premium on the metal delivered to the Midwest have almost tripled this year to reach a record near 66 cents a pound.

“The impact of tariffs is still feeding through to inflation and sentiment,” Rio said in an overview of the US economy in its first-half production report.

The FT:

The cost of Trump’s tariffs are also not falling solely on American consumers, supply chain experts say, as international brands look to spread the impact of cost increases around the globe to minimise the impact on the US market. Simon Geale, executive vice-president at Proxima, a supply chain consultancy owned by Bain & Company, said major brands such as Apple, Adidas and Mercedes would look to mitigate the impact of price increases.

“Global brands can try and swallow some of the tariff cost through smart sourcing and cost savings but the majority will have to be distributed across other markets, because US consumers might swallow a 5 per cent increase, but not 20 or even 40,” Geale said.

State of U.S. Tariffs: July 14, 2025

From the Yale Budget Lab:

• Consumers face an overall average effective tariff rate of 20.6%, the highest since 1910. After consumption shifts, the average tariff rate will be 19.7%, the highest since 1933.
• The price level from all 2025 tariffs rises by 2.1% in the short-run, the equivalent of an average per household income loss of $2,800 in 2025$. Annual pre-substitution losses for households at the bottom of the income distribution are $1,500. The post-substitution price increase settles at 1.8%, a $2,300 loss per household.
• The 2025 tariffs disproportionately affect clothing and textiles, with consumers facing 44% higher shoe prices and 40% higher apparel prices in the short-run. Shoes and apparel prices stay 20% and 18% higher in the long-run respectively.
• US real GDP growth over 2025 is -0.9pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.5% smaller, the equivalent of $135 billion annually in 2024$.
• The unemployment rate rises 0.5 percentage point by the end of 2025, and payroll employment is 641,000 lower.

A return to tariffs, Taco or not Trump’s focus on the goods of the past is ridiculous. What matters is competitiveness in the future (Martin Wolf)

(…) It is, not least, crazy to believe the US can run a huge fiscal deficit without also running large trade and current account deficits, at least as long as the rest of the world is prepared to finance them. What happens if or when the world stops? A financial mess. (…)

In the meantime, the irrational patchwork of tariffs now being proposed would cause large misallocations of resources. One of the points the Trump regime is unable to understand is that tariffs on some goods are a tax on production of others. High tariffs on inputs, such as steel or aluminium, are a tax on producers of the goods that use them.

If the latter produce import substitutes, tariffs could at least partially offset such costs. But if they produce exportables, they could not.

So, Trump’s tariffs would benefit the least internationally competitive parts of the economy at the expense of the most competitive. Does that make sense? Obviously not.

Worse, the entire focus on the goods of the past is ridiculous. What matters is competitiveness in the future. This then is the economic equivalent of attempts to recreate dinosaurs. As MIT’s David Autor and Harvard’s Gordon Hanson note, the challenge for the US today is China’s rise as a technological and scientific superpower. If it is to respond, the US must co-operate with its allies, devote far greater resources to scientific research and welcome talented immigrants — the exact opposite of what Trump is doing.

“Make American Great Again”? Hardly. Markets are ignoring these longer-run perils for the US. They might be right. But then they might not. (…)

So, what is to be done about this madness? First, we should hope that Trump does indeed chicken out again and again and again, though the uncertainty created would still be costly. Second, there must be retaliation — ideally co-ordinated retaliation — against the US. Third, all members of the World Trade Organization should declare that any trade concessions made to the US will be extended to other members, in accordance with the “most favoured nation” principle. Finally, the other members should also abide by their agreements with one another.

The US has gone rogue. The rest of the world need not follow.

Bessent Suggests Powell Should Leave Fed Board in May

US Treasury Secretary Scott Bessent suggested that Federal Reserve Chair Jerome Powell should step down from the central bank’s board when his term as chair is up in May 2026.

“Traditionally, the Fed chair also steps down as a governor,” Bessent said in an interview with Bloomberg Television Tuesday. “There’s been a lot of talk of a shadow Fed chair causing confusion in advance of his or her nomination. And I can tell you, I think it’d be very confusing for the market for a former Fed chair to stay on also.”

Powell’s term as a Fed governor doesn’t end until January 2028, leaving it possible for him to remain at the central bank — and to participate in monetary policymaking — even after his tenure as the chair comes up next May. (…)

BTW:

Breadth has been visibly lacking, as Bloomberg News has reported. The Magnificent Seven index of megacap stocks has surged about 36% from its April lows, compared to 25% for the S&P. Bloomberg Intelligence strategists Gina Martin Adams and Gillian Wolff say the rally is powered by 10% of stocks, down from a 22% average between 2010 and 2024. That’s not a good sign. (…)

Overall, the S&P 500 is up 6.16% for the year, but 219 member stocks are down. Vincent Deluard of StoneX Financial says the rally is “carried by the Magnificent Seven, which foreign investors have not sold because these companies have no equivalent outside of the US.” Describing the country as “an emerging market with magnificent monopolies,” he suggests it’s vulnerable to an EM-like selloff once liquidity tightens. It certainly looks unhealthily narrow. (John Authers)