Comments based on information available as of 7:00am CT on 7/03/2025
Growth: Pent Up Animal Spirits?
The Job Openings and Labor Turnover Statistics is not the most reliable labor market survey. The response rate is down from 70% in 2015 to 35% in 2025. The big increase in job openings in May may be noise. Or is it pointing to some optimism? The hires, quits, and layoffs rates are all low, but is it possible that businesses are posting job openings in case there’s more clarity on tariffs and taxes, unleashing some animal spirits?
Inflation: Under Pressure
The ISM manufacturing index showed prices paid by firms increased at a faster pace in June than in May. Input prices have been on that path since March of 2024. The ability of businesses to pass those cost increases on to consumers is limited by competition, but also a choosy consumer. In this environment, profits can come under pressure unless executives can squeeze out efficiencies elsewhere. The biggest surprise ahead might be how many firms can pull off that trick.
Policy: Pivoting From Late To Wrong?
A data dependent Fed used to mean that investors could count on the Fed to monitor the incoming data and react to it. Because data come out with a lag, the Fed was destined to be late. Now the data the Fed is depending on for policy is future data. It’s trying to shift to being forward looking. The problem is that instead of the risk of being late, it risks just being wrong about what the data will eventually be. Instead of reacting, it may need to overreact when data roll in that differs from what it was expecting.
Looking Ahead: Diamonds In The Rough?
The Fed’s reliance on guesswork presents new risks, but the environment isn’t entirely pessimistic. There is the potential for “animal spirits” to be unleashed by tariff and tax policy clarity. Valuations by many measures are stretched, but they’re not stretched uniformly for every company out there. Some market rallies and drops could be broad-based, but during the drops it might make sense to quickly identify those diamonds in the rough to hold for the long-term.
