Mostly negative surprises this week

Trend watch

As expected, weekly air passenger counts slipped 0.3% this week, which lines up with the traditional peak for summer air travel during the last week of July. Hotel occupancy also appears to have peaked.

The remaining activity-based figures – rail, freight, staffing, etc. – continue to see ripples, which we attribute to tariff-related distortions. 

Our take

There was a decidedly negative tilt to the economic trends this week. At the top of the list in terms of importance was the July jobs clunker. (Again, we published a separate commentary discussing the jobs report.) It was far from alone as it was accompanied by the weak trade balance figures, shaky manufacturing purchasing managers indices, and uneasy consumer confidence surveys.

It was also paired with more signs that tariffs are seeping into inflation readings. And the aforementioned wave within the trade numbers swung second quarter growth to a big positive, though the underlying details were markedly weaker than the headline growth suggested. 

We’ve repeatedly warned here to “beware of the mirage in the economic data due to tariff front running.” We’ve also noted that there were “air pockets ahead.” For instance, freight volumes have experienced big swings in the past few months, with a sharp decline in May, a strong rebound in June, and another notable downturn underway currently. That impact isn’t just at the ports – its rippling through all parts of the economy from railroads and truckers to warehouses and support services.

Welcome to the muddle through economy – one that’s riddled with distortions due to tariffs. Hence, the previous signs of strength were a mirage, while lackluster data – such as the July jobs report – potentially exaggerates the extent of the weakness.

Which brings us to “what does this mean for the Federal Reserve (Fed)?” We believe that the U.S. economy, particularly consumers, are less interest rate sensitive compared to history given that mortgages comprise 70% of consumer debt and the vast majority of American homeowners locked-in low mortgage rates in the decade between the Great Financial Crisis and the COVID pandemic. The effective mortgage rate for all outstanding mortgages is a very enviable 3.9%, considering the average new 30-year fixed mortgage rate is 6.7% this week.

Therefore, while we expect that the Fed will resume rate cuts heading into year end, we don’t expect that lowering interest rates would be the silver bullet some herald. For instance, there’s been a lot of talk about high mortgage rates hampering housing activity, but the real culprit is home price. For existing homes, the median price has soared an eye-popping 59.4% since December 2019. Similarly, though not nearly as bad, new home prices have risen 21.9% over the same span.

Thus, price is a dramatically bigger factor in the affordability struggle for homebuyers and potential homeowners. Moreover, mortgage rates can be refinanced, while the cost of the home cannot (if the homeowner wanted to stay in the home). Indeed, lower mortgage rates would help some borrowers on the margin but isn’t going to fix the housing affordability issue.

Additionally, there’s mounting evidence that tariffs are spurring price increases within the recent inflation readings. Hence, lowering interest rates substantially might help a narrow slice of homebuyers but would be the wrong move in terms of inflation. This is the Fed’s conundrum, especially if the tariff-related distortions and inflation pressures persist.

Lastly, just as we’re finishing up this publication, news broke that Fed Governor Adriana Kugler will step down next week (August 8, 2025) roughly six months before her term was scheduled to end in January. It should be noted that Dr. Kugler missed this week’s Fed meeting and did not vote. This will definitely change the Fed dynamics sooner than expected.

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.