Economic Outlook - The employment report is weaker than expected due to downward revisions, raising recession fears, but the analysis suggests a "rolling recession" [2] - The expectation is for a strong recovery, possibly starting as a "rolling recovery", with upside surprises in real growth and productivity, and downside surprises on inflation by the midterm elections next year [5][6] - Geopolitical risks remain, particularly concerning Russia-Ukraine, China, and Mexico, but the biggest uncertainty is the Federal Reserve's (Fed) policy [7][8] Fiscal Policy - Year-to-date deficit as a percentage of GDP has shrunk from approximately 73% to 62% [10] - Tariffs are annualizing at an estimated $450 billion per year, potentially leading to a deficit of roughly 47% of GDP [10] - The analysis suggests that the deficit as a percentage of GDP could reach 3% by the end of 2026, two years ahead of the Treasury Secretary's objective [11][12] - Approximately 75% of capital spending will benefit from permanent expensing, which is expected to attract manufacturing back to the United States and boost productivity [18] - Factoring in expensing, the US corporate tax rate could effectively drop to the 12-14% range [19] Monetary Policy - Despite Chairman Powell's hawkish tone, the data suggests the Fed may ease, with odds for a rate cut in September up to 88% and a 50 basis point rate cut at approximately 25% [4] - Real private domestic final sales are growing at approximately 1%, indicating cautious consumer behavior and a rising savings rate, potentially crossing 5% this year [21][22] - The 2-year Treasury yield less the 3-month Treasury yield is below zero, indicating restrictive monetary policy, which historically precedes recessions [26] - Truflation, which measures thousands of items in real time, suggests that inflation may stabilize and then decline towards or below 2% [33][24] Market Indicators - Economic policy uncertainty reached unprecedented levels during tariff turmoil, even higher than during the 2008-2009 financial crisis and the COVID-19 pandemic [36] - Revisions to non-farm payrolls were extreme, typically seen only in recessions, confirming the "rolling recession" [47] - Federal government employees are down by 84000 year-to-date, with an expected additional 150000 layoffs by the end of September, potentially impacting consumer confidence [48][49] - The consumer confidence index shows a decline in jobs being easy to get, suggesting potential economic weakness [51][52]

Economic Outlook - The analysis suggests the economy has been experiencing a rolling recession for the past three years, with softening indicators particularly in the consumer and housing sectors [1] - The report anticipates a transition from a rolling recession to a rolling recovery, expected to gain momentum from the end of the current year into the next, driven by productivity gains and real GDP growth [1] - Productivity is expected to be a significant surprise and a potent anti-inflationary force, potentially leading to lower-than-expected inflation due to deflationary pressures from new technologies, especially AI [1] Fiscal Policy - The expectation is that tax rates will remain stable, which is considered a crucial factor [1] - While government spending and deficits are acknowledged as concerns, the analysis suggests that spurring growth through innovation is key to lowering the deficit [1] - The corporate tax rate could effectively decrease to the 14-15% range due to full expensing of capital equipment, potentially attracting increased foreign direct investment [2] Monetary Policy - Although M2 money supply growth has accelerated to approximately 45%, it is still considered low historically [1] - There are signs that monetary policy might be too tight, as indicated by the inverted yield curve, specifically the 90-day T-bill rate versus the 2-year yield [1][2] - Recent economic data, such as CPI, PPI, and PCE deflator, indicate that tariff increases have had minimal impact on the overall pricing structure of the economy [1] Employment and Labor Market - The employment report is viewed as weak upon deeper analysis, with government employment accounting for a significant portion of the non-farm payroll increase [2] - Average hourly earnings are up 37% year-over-year, but with expected productivity increases, underlying inflation related to labor could fall below 2% [2] - There are indications of stress in the labor market, with rising continuing unemployment claims and difficulties for college graduates in finding jobs, potentially due to AI impacting entry-level positions [3] Housing Market - The housing market is described as weak, with new and existing home sales at low levels by historical standards [3] - New home prices have been slipping for a couple of years, and existing home prices are also starting to decline [5] - A recent directive allows cryptocurrency to be considered in mortgage qualifications, potentially opening up the housing market to younger buyers [4]