Summary

Living in the 'Yeah But' Economy The consensus on the economy, the stock market, and the employment situation is that there is not much of a consensus. Each indicator remains reasonably healthy, but with question marks. Investors are watching each new data point carefully, but with little confidence that they mean what they seem to mean. And no one is quite sure what is coming next. The bond market is spooked by the deficit implications of 'The One Big Beautiful Bill,' yet interest rates are moving down from recent peaks. The sudden resurgence of the Israel-Iran conflict adds a new layer of uncertainty to what was already an opaque environment, yet it too showed signs of receding in importance in the U.S. stock market. Tariff uncertainty remains the biggest complication in the outlook, but the response to tariffs is far from universal. In the face of any sign that tariffs have compromised or have not compromised economic growth, there is a 'yeah but' waiting in the wings. Tariffs are bad; 'yeah but' they had an immaterial impact in the first Trump administration and have not seemed to slow the economy much this time. Okay, then we can live with tariffs; 'yeah but' most tariffs are paused and not yet dragging on the economy, and we have yet to really feel the impact of reciprocal tariffs from our trading partners. With the consensus being no consensus, and with normal business planning replaced by ad hoc approaches that flex based on day-to-day realities, investors are left to do what they always do: parse the economic data (perhaps a little more carefully) and listen to Fed-speak (though perhaps a little more closely). Economic Data Not Showing Much of a Tariff Impact The big concern with tariffs is that they will slow employment growth and raise prices. First-quarter GDP was the one place where tariffs clearly showed up in the data. But that reflected anticipatory actions rather than actual tariff impacts. First-quarter U.S. GDP declined 0.2%, reflecting a nearly five-percentage point subtraction to GDP due to companies loading up on imported goods ahead of the April 2 'Liberation Day' tariffs. Private inventories rose over 2.5 percentage points, as all those goods had to go somewhere. Corporate capital spending (non-residential fixed investment) also ramped up with double-digit growth, while consumer spending (personal consumption expenditures) grew moderately. Second-quarter GDP, according to the Atlanta Fed's GDPNow predictor, is on track for nearly 4% growth given that imports (subtractive to growth) will be nearly non-existent after the first-quarter splurge. Outside of GDP, most of the data lends itself to a 'yeah but' interpretation. The first big data point of June, nonfarm payrolls for May, slightly exceeded consensus expectations. The U.S. economy created 139,000 new jobs in May, better than the 129,000 consensus estimate, though down from a revised 147,000 for April. Unemployment remained at 4.2%, in line with consensus and the prior-month level. And hourly wages grew at a healthy 3.9% annual rate, roughly in line with the 4% trend of recent years. In the 'yeah but' category, April job gains were revised lower by 30,000 and March payrolls by 65,000. That pushed three-month average monthly jobs growth down to 135,000 from 155,000 prior to the May report. Some questioned the quality of jobs, with heavy concentration of new jobs in relatively low-wage areas such as healthcare (78,000 new jobs). The manufacturing sector, which gained 5,000 jobs in April, shed 8,000 in May. Other nonservice industries, such as mining, oil and gas extraction, and construction, were little changed. Federal government employment declined by 22,000 and is down by 59,000 since January. That is much less than the 284,000 federal layoffs announced this year, according to Challenger, Gray & Christmas. Of note, former federal employees receiving ongoing severance payments are not yet counted as unemployed. The second big data point in June was in the form of the May CPI report, which came in a little bit better than expected. All-items CPI increased 0.1% month over month while the consensus and prior-month reading were both 0.2%. Headline CPI rose 2.4% year over year, also a tick better than the 2.5% consensus. Looking at core inflation, CPI excluding food and energy rose 0.1% month over month and 2.8% year over year. In the 'yeah but' category, both all-items and core inflation remain frustratingly above the Fed's 2% target level. In the 'yeah but, but' category, two stubborn inflation series, transportation services and shelter, have declined meaningfully. These typically sticky categories have kept overall inflation elevated even as goods inflation has backed down in the past year. The Producer Price Index (PPI) for May rose 0.1% from April. That was better than the 0.2% consensus call, but worse than the negative reading (-0.2%) for April. The annual change in core PPI was 2.6%, in line with consensus and up from 2.4% for the previous 12-month period. Core PPI (excluding food, energy, and trade services) was up 0.1% monthly and 2.7% annually. Consumer sentiment as recorded by the University of Michigan's Consumer Center bounced higher to 60.5 in June from a cycle low of 52.2 in the prior month. Likely driving this recovery is the recent CPI and PPI data, which are not yet showing meaningful price pressure from tariffs or from other administration policies. The 'yeah but' here could come from the 50% tariffs on imported steel and aluminum that went into effect early in June, right after the UMich survey closed. While these new duties will take time to work through the economy, economists expect hefty steel and aluminum tariffs to push up prices for vehicles, appliances, and new home construction. Prices for these goods are already very high, and new tariffs risk pushing prices out of reach for more and more consumers. Another 'yeah but' is the willingness or ability of goods manufacturers to absorb tariffs rather than pass them on to buyers. Fed Expected to Stand Pat As of this writing, the Federal Reserve's Open Market Committee (FOMC) had not yet concluded its June 17 and 18 meeting. Heading into that meeting, the CME's FedWatch tool showed a very low possibility of any change in rate policy. The probability of the Fed's target range for the fed funds rate remaining at 4.25%-4.50% was 99.9% as of 6/16/25. Early in his second term, President Trump pressured the Fed to cut rates 'immediately,' but backed off when his own administration officials suggested that threats to Fed independence were tanking the dollar and the Treasury market. The White House and GOP need the bond market to be well-behaved, given that the prospect of higher deficits from 'The One Big Beautiful Bill' are putting upward pressure on interest rates. The generally positive May CPI and PPI data did not go unnoticed in Washington. The White House responded to the good inflation data by reviving pressure on the Fed to cut rates. In making their case, administration officials also pointed to rate cuts recently announced overseas. In