Copy of AFF Sentinel V22 #03-The Economy Beginning 2025
- Steve Dittmer
- Jul 22
- 4 min read
Sorting the Complexities Is Not Easy
Steve Dittmer | AFF Sentinel
Colorado Springs, CO
Originally sent to subscribers 01/13/25
So, exactly, where is the U.S. economy right now?
There are a lot of aspects to examine but one thing economists and commentators seem to agree on is this: our economy is a lot better than elsewhere in the world. Europe and Asia, for example, are in lots more trouble than us.
Our GDP is still positive, our job numbers -- although there is lots of analysis required here -- are improving and the psychological attitude is good for most. In fact, several folks are terming the shift to optimism the “Trump Effect.”
The biggest worry is inflation, unless it is the concern that the Fed doesn’t seem to recognize inflation causes, looks at the wrong things and interprets them incorrectly.
Maybe it’s a good thing the Fed doesn’t have the sway or control over the economy it once did.
The bond market is reacting in just the opposite fashion, pricing bonds higher because of worry about the debt, even though the Fed has cut interest rates. So, the bond markets are pricing the cost of buying government paper higher, judging that the price the Fed has put on interest rates as too low for them, economist Joe LaVorgna told Kudlow. LaVorgna is an economist and investment officer.
But John Carney notes that in times of rampant inflation, people see everything as causing inflation, when that’s not necessarily the case. It’s kind of a form of financial PTSD, in that some folks now see growth as bad, fearing upward pressure on wages but discounting the productivity gains that come from growth.
Last week’s jobs report was better than expected at 250,000 plus but at least 100,000 of that was government or government-related jobs. The total was roughly 100,000 better than expected.
The unemployment rate dropped from 4.2 to 4.1 percent.
So why did the stock market sell off on the major indexes after the announcement?
The bond market, especially the long bond traders, are still worried about inflation kicking up again and the Fed’s seemingly oblivious attitude, having raised rates three times at the end of 2024.
Regardless, the Fed has indicated not very many rate cuts in 2025 so that took some wind out of the markets. Although, there are those who don’t fear a 10-year bond in the 4.5 to 5 percent range, believing that’s more normal than the two-and-three percent range we got used to when the Fed was easing.
But most distressingly, the bond traders seem wrapped up in the same Keynesian thought the Fed is locked in to. They’re concerned Trump’s aggressive moves to boost the economy will rekindle inflation, because they equate stronger demand with inflation instead of stronger supply easing inflationary pressures and boosting productivity. The Fed and the bond markets still think killing off demand is the way to stop inflation.
Nancy Tengler, financial expert and Art Laffer partner, said part of the problem is that the Fed tries to be data driven but their data is faulty. One of their key surveys boast only a 35 percent response rate.
Chairman Jay Powell has been part of the same process the Fed has been using for years, so it’s unlikely the Fed would alter their process unless there is a new Fed chairman.
We understand the household jobs survey covers smaller businesses, and some believe it represents the most accurate measure of private sector job growth. Which probably means big companies with bigger staffs respond to the surveys and small companies are not represented in the sample.
But over the last year, it has shown private sector jobs decreasing.
Economist John Carney has arrived at the conclusion that the government jobs have actually been pulling people out from the private sector, which showed just 150,000 new jobs this month.
But the optimism -- the rekindling of “animal spirits” among most businesses and voters -- comes from relief the Biden administration is leaving. Trump and the conservative Republicans’ plan of lower tax rates, fewer regulations, reversing regulations, cheaper energy, less border intrusions and less crime, and lower interest rates than the beginning of 2024 are rightly the basis of the optimism, the “Trump Effect.”
Of course, that’s not an instantaneous process. It will take some time but the very thought of the end of the war against business, the war against fossil fuels and the slowdown or elimination of DEI and ESG movements, are cause for celebration among businesses and voters. There will still be a monstrous budget deficit this year, the Fed has printed lots of money to finance the four years of the Biden administration’s spending and the new budgeteers may be figuring in a few hundred million in tariff fees that may or may not happen.
Next time: More on our present economy.
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