Mixed economic data reflects an economy muddling through the distortions from the ongoing rollout of tariffs
August brings a new round of economic data flashing mixed signals about the job market, wages, prices, and inflation but suggesting that the economy has the foundational muscle to muddle through. While last month’s passage of the One Big Beautiful Bill Act (OBBBA) removed some policy uncertainty around taxes and the Federal debt ceiling, the on-again/off-again tariff policy continues to drive distortions in economic data. So far, previous signs of economic strength have been a mirage, while lackluster data potentially exaggerates the extent of the weakness. We suspect that the true trend is somewhere in between.
U.S. consumers, supported by a stable labor market and modest wage growth, have been the mainstays of the economy as it faced various challenges over the past several years. On the surface, the 73,000 increase in payrolls reported in July that missed the consensus expectations by 104,000 and the sharp downward revision of 258,000 of the previous two month’s results were worrying signs. Yet, the details paint a different picture. About half of all the downward revisions, or 129,000, were government jobs. Additionally, private payroll growth surged to 83,000, led by an increase in payrolls in the education/health service industry group. That leaves the unemployment rate at 4.2%, ticked up 0.1%, but only slightly ahead of the pre-pandemic 3-year average of 4.0% and below the historical average of 5.7% since 1948. Average weekly hours worked rose by 0.1 to 34.3, just below the pre-pandemic average of 34.4. Annual wage growth was 3.9% both for all workers and for rank & file workers, compared to a pre-pandemic average of 3.0% for both. When combined with a 2.4% rise in productivity in Q2, that’s positive news for the U.S. worker.
Tariffs continue to be a source of distortion in the economy and are likely a key factor driving economic data swings. There’s mounting evidence that tariffs are behind price increases with the consumer prices (CPI) up 0.3% in June. The good news is that tariff-driven price increases don’t appear to be as bad as feared. One reason could be that less than half of all U.S. imports are currently subject to tariffs. Take trade with Canada: Recent trade data shows that approximately 90% of Canadian goods are considered compliant with the United States-Mexico-Canada Agreement (USMCA), meaning they are duty-free or subject to minimal tariffs. Beyond inflation, tariffs have introduced volatility into overseas freight shipments. The first quarter of 2025 saw a surge of containers into the U.S. driven by tariff frontrunning, followed by plunge in Q2, and another wave of freight arriving at the start of Q3—Port of Long Beach container traffic is up 34% in July. To cut through the tariff noise, we’ll continue to watch retail sales data closely to gauge the impact of tariffs on consumer demand.
Bottom line:
The U.S. economy remains in a muddle-through environment. Economic data will continue to jostle due to air pockets as demand normalizes following accelerated purchases by consumers and businesses attempting to front-run tariffs. While we don’t believe that tariffs will be catastrophic for the U.S. economically, they will certainly continue to distort behaviors and, in turn, the economic data.
