U.S. Economic Snapshot

by paul gomme and peter rupert

There were several data releases as well as a Fed meeting this week. The Jobs Openings and Labor Turnover Survey (JOLTS) was released on Tuesday. The release reported that there was little change in job openings, hires and total separations. The graph below shows that there are still slightly more jobs available, 7,437,000 than unemployed persons, 7,015,000.

Another useful statistic is the rate of job openings, determined by the number of openings divided by the number employed plus openings, that is, filled and unfilled jobs. This number has been steady over the past year once the outsized rates in the post-pandemic period eased. The other rates in the graph are found by dividing the level by total employment. The quit and layoff rates have been flat in 2025.

On Wednesday the BEA announced that real GDP increased 3.0% on an annulaized basis in the second quarter. Consumption increased 1.4%, investment fell 15.6% and government consumption and investment increased 0.4%. Exports and imports declined, 1.8% and 30.3%, respectively.

A different way of thinking through the above National Income and Product Accounts (NIPA) data is in terms of contributions to output growth. The 3% growth in output can, then, be decomposed as: 1 percentage point due to consumption, 0.1 percentage points due to government spending and 5.1 points due to imports. Investment exerted a 3 percentage point drag on output growth while exports contributed -0.2 percentage points. Of particular importance is the 30.3% decline in imports following a 37.9% increase in Q1. A reasonable interpretation of this data is that Trump’s promised tariffs boosted imports in the first quarter (as businesses imported goods ahead of the tariffs). The large negative growth of imports in the second quarter then reflects an “unwinding” of the first quarter hike in imports.

On Thursday of this week the BEA announced the PCE price index from the Personal Income and Outlays release. The release showed an increase in the PCE price index of 3.42% on annualized basis after rising 2.03% in May. Our preferred trend measure increased to 2.66% from 2.28%. The PCE core measure cruised past the 3% mark to 3.12%, about half a percentage point higher than the previous month. Our trend measure of PCE core inflation rose from 2.69% to 2.83%. These PCE inflation numbers were largely foreshadowed by the CPI data released over 2 weeks ago.

Finally, at the end of the week, the BLS announced that payroll employment increased 73,000. Even worse, there were also downward revisions totaling 258,000; 125,000 in May and 133,000 in June. There was one small positive bit in the report, average hours of work increased to 34.3 from 34.2.

The goods producing sector shed 13,000 jobs for the third consecutive month. The service sector, however, saw continued growth, increasing 96,000. Interestingly, the diffusion index (indicating the fraction of firms increasing increasing or not changing employment) rose to 51.2, meaning that more firms increased employment than decreased it.

The household survey also showed considerable weakness, employment fell 260,000 and the labor force participation rate declined to 62.2 from 62.3. The unemployment rate inched up slightly from 4.12% to 4.25%.

Policy Outlook

The FOMC now finds itself in an unenviable position of seeing inflation well above target and a weakening real side of the economy. It may seem strange to describe the real side as “weak” when output recorded a 3.0% increase. The problem is the effect of tariffs on imports. We don’t want to make too much of the decline in exports, but will be watching to see if U.S. trade partners respond to U.S. tariffs by pulling back on their imports of U.S. goods and services – which will be reflected in lower U.S. exports. The -15.6% growth in investment similarly looks bad except that it comes on the heels of a very robust 23.8% growth rate in the first quarter.

On the real side, labor market developments are starting to turn down. We were comforted by the solid job gains in April and May, but the revised data suggests a more anemic job market. While the 73,000 jobs added in June look better than the revised numbers for April and May, that’s not saying much. The weak labor market would seem the best case for those pushing for a Fed funds rate cut.

On the other hand, inflation continues to run higher than the FOMC’s 2% target and is now moving in the wrong direction (that is, away from 2%). Some policymakers are arguing that the effect of tariffs will be a level shift in prices that will have no lasting effects on inflation. While this is plausible, this case would be stronger if there were evidence in its favor. We’ve yet to see such evidence. Remember that policymakers also argued that the effect of the pandemic would similarly be a left shift in prices with no lasting effects on inflation. As Montgomery Scott famously said, “Fool me once, shame on you; fool me twice, shame on me.”

Over the past few years, the FOMC has tried to engineer a so-called soft landing in which inflation is brought under control without causing a recession. The Committee now faces rising inflation and a potential recession. Since the Fed only has one instrument (the Fed funds rate), it cannot address the two targets, inflation and unemployment. Job one for monetary policymakers is to keep inflation in check. Let fiscal policymakers handle the real side.

The BEA’s personal income and outlays release for May provides a mixed message on PCE (personal consumption expenditure) inflation. Core PCE inflation which excludes the more volatile food and energy components rose from 2.58% to 2.68% on a year-over-year basis. This is the measure of inflation favored by the Federal Open Market Committee. The month-over-month rate popped up from 1.64% to 2.17% at an annual rate. And yet, our trend measure of inflation fell from 2.56% to 2.43%. Why the difference in these measures of inflation? Mechanically, the year-over-year rate is the average of the last 12 month-over-month inflation rates. The increase in the year-over-year inflation rate reflects the fact that this 12 month “window” added May 2024 (2.17%) while dropping May 2023 (0.98%). Meanwhile, our trend measure fell because the May 2024 month-over-month inflation rate (2.17%) is less than our trend measure for April (2.56%).

The picture is largely the same when looking at the overall PCE inflation rate: The month-over-month rate rose from 1.42% to 1.64%; the year-over-year rate edged up from 2.20% to 2.34%; and our trend measure eased from 2.25% to 2.04%.

The BEA release also shows a decline on a month-over-month basis in nominal personal consumption expenditures. However, this is a very volatile series. The year-over-year growth rate smooths out these fluctuations. Over the past few years, personal consumption expenditure growth has been falling. We place little importance in the month-over-month decline reported for May.

Real personal disposable income fell in May when computed on a month-over-month basis (its growth rate was negative) while the year-over-year growth rate declined.

Today, the University Of Michigan released its survey-based measure of inflation expectations over the next 12 months. In brief, consumers’ expectations of inflation have risen in 2025 and now sit at nearly 7%. Alternatively, the 5-year Breakeven Inflation Rate measures the average inflation rate over the next 5 years based on 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. Given that the inflation-indexed security is based on the CPI (consumer price index), and CPI inflation tends to run 0.5 percentage points higher than PCE inflation, it seems that investors expect inflation to average very close to the Fed’s 2% target.

The University of Michigan also released its measure of consumer sentiment (or “confidence”). While this series exhibits considerable volatility, it seems fair to say that consumer sentiment has dropped quite sharply in 2025.

Policy Implications

Is it time for the FOMC to start lowering its policy rate? Jockeying by potential candidates for the Chair of the FOMC suggests it is. Based on the data, it’s hard to make a strong case for lowering the Fed funds rate at this time. The data analyzed above tells us that inflation is still running a bit too hot relative to the Fed’s 2% target for core PCE inflation. The labor market continues to record solid employment gains. In about a month, we will get an initial reading on Gross Domestic Product for the second quarter, but at this juncture, it seems likely to be a solid quarter. One could argue that the FOMC can raise rates again if inflation pops up. But this sort of interest rate volatility is something that the Fed tries to avoid, and it always seems more difficult to raise rates than to lower them. In summary, the economic case points to maintaining the Fed funds rate at its current level.

The FOMC announcements have typically called for no change in policy in order to wait for more conclusive data, given the uncertainty in tariffs as well as geo-political concerns. There does not seem to be much in the way of additional clarification, other than PCE core inflation has been riding steadily above the Fed’s preferred target.

The BLS’s announcement of the May CPI showed little change in the inflation rate. On a year-over-year basis, the CPI inflation rate ticked up from 2.33% in April to 2.38% in May. However, the annualized monthly inflation rate fell from 2.68% to 0.97%. Our measure of trend CPI inflation fell from 2.37% to 1.91%.

The situation was largely similar with regards to core CPI (excluding food and energy) inflation. The year-over-year measure barely changed, from 2.78% to 2.77%; the montly rate fell from 2.88% to 1.57%; and our trend measure dropped from 2.66% to 2.30%.

Fed watchers know that the FOMC focuses on core PCE inflation, not CPI inflation. That said, there’s considerable overlap in these two price level measures, and in general the two measures of inflation move together. Based on the CPI report, it seems unlikely that core PCE inflation will rise markedly. That inflation remains somewhat subdued and the real economy has not shown any real signs of slipping, it appears unlikely that the Fed will make any interest rate movements soon.

Looking at the annualized monthly CPI inflation rate, March looks like an outlier: April inflation is up (again). The overall CPI rose from -0.6% in March to 2.68% in April; excluding the volatile food and energy components, core CPI inflation popped up from 0.68% to 2.88%. Nonetheless, the annual inflation rate fell slightly from 2.41% to 2.33% (overall CPI) or from 2.81% to 2.78% (core CPI). The decline in the annual inflation rate reflects the observaton that the monthly inflation rate for April 2024 exceeded that for April 2025.

Our trend measures of CPI inflation also rose: from 2.21% in March to 2.37% in April for overall CPI inflation, and from 2.55% to 2.66% for core CPI inflation. Regular readers will remember that our trend measure of inflation sees through the blips in the monthly inflation rate while also being more responsive to underlying changes in trend than the annual inflation rate.

We pay attention to CPI inflation because it tends to move together with PCE inflation (the Fed’s preferred measure) which will be released in a couple of weeks. The tick up in April’s CPI inflation suggests that we may see a similar increase in April’s PCE inflation. The prospects for the FOMC cutting interest rates remains dim.

April saw solid job gains of 177 thousand according to today’s Employment Report from the BLS. While employment gains in April were lower than the revised figures for March (185 thousand, revised down from 228 thousand), April’s job gains easily exceeded those over the past 12 months (152 thousand).

While the government sector added 10 thousand jobs in April, the federal government shed 9 thousand jobs. In fact, in each of the past 3 months, federal govenment employment has fallen, presumably reflecting the efforts of DOGE to reduce the size of the federal government workforce. However, as noted in the BLS’s press release, employees on paid leave or receiving severance pay are considered employed in the establishment survey.

The household survey portion of the employment report showed a small uptick in the unemployment rate, from 4.15% in March to 4.19% in Aprl. The unemployment rate has varied in a fairly narrow band, between 4 and 4.2% since the middle of last year.

In Aprl, average hourly earnings rose 6 cents, to $36.06. However, workers ought to care about the goods and services that their wages garner — that is, their real wage. The figure below shows that real average hourly earnings have been increasing over the past couple of years. How much the real wage has gone up depends on the measure of prices, with flatter real wage growth when measured using either the CPI or core CPI, and somewhat faster real wage growth using the PCE or core PCE deflator.

Many economists are predicting a severe recession if Trump carries through with his planned tariffs. Thus far, we aren’t seeing these effects in the labor market. Nor does the Chauvet and Piger measure show any threat.

by paul gomme and peter rupert

In its advance estimate, the BEA announced that Q1 GDP declined 0.3% on an annualized basis. Total output (GDP) is the sum of consumption, investment, government spending and net exports (exports – imports). Given the turmoil from Washington, DC, investment and imports saw outsized gains, 21.9% and 41.3%, respectively. But one needs to be careful here in interpreting these numbers. Imports do not add or subtract from GDP. Those who claim that imports are a drag on GDP are simply wrong. When someone imports a $1,000 TV (imports go up but enter the GDP calculation with a negative sign), someone buys that TV so consumption goes up by that same amount. It seems that most journalists reporting on this make the mistake that it was, in fact, imports driving down GDP. Here is a nice explanation that goes deeper.

Consumption grew 1.8% and government consumption fell 1.4%.

A different way to view the GDP numbers is in terms of contributions of the major components to output growth (that is, weighting the growth rates of the various components by their shares of GDP). Recall that output growth was -0.28% (annualized). Investment contributed 4.01 percentage points to output growth while consumption added 1.24 points. Exports chipped in a meager 0.2 percentage points. Negative contributions were recorded by government spending (-0.25 percentage points) and -6.48 points due to the surge in imports.

The BEA also released the Personal Income and Outlays report that showed an annualized decline of 0.53% in the personal consumption expenditures price index in March (down from 5.47% in February) while our preferred trend measure came in at 2.46% (a drop from February’s 3.96%). On a year-over-year basis, PCE inflation slipped from 2.69% to 2.29%. The core PCE inflation remained positive at 0.33%, a plunge from 6.14% in the previous month); our trend measure dropped from 4.03% to 2.80%; and the year-over-year rate dipped from 2.96% to 2.65%. Interestingly, these declines in PCE inflation were largely foreshadowed by similar declines in CPI inflation (released two weeks ago).

The large spike in imports could plausibly be caused by buying before the tariffs kick in and so would likely be transitory. The same might be said for investment as the largest component was equipment investment, rising 22.5% on an annualized basis. With the large effect from imports driving the decline in GDP and the fact that inflation remains above the Fed’s target presents a case for the Fed to keep the fed funds rate at its current level.