Weekly global economic update

Week of October 13, 2025

• Artificial intelligence is driving the US economy
• Japanese politics drive a new economic direction
• Gold price surge tells us something about the economy
• The latest on trade

Artificial intelligence is driving the US economy

• To the extent that there is strength in the US economy and in the US asset markets, it is almost entirely due to the big bet on AI. Absent the performance of AI-related equities, US equity prices would have underperformed European equity prices. In fact, it has been estimated that AI-related companies were responsible for 80% of the recent gains in the S&P 500 index of US equities. And absent investment in AI-related equipment and software, the US economy would have grown very slowly in the first half of this year.  Indeed, business investment in information processing equipment accounted for 46% of US GDP growth in the first half of 2025. If investment in software is added, then these two categories were responsible for more than 90% of GDP growth in the first half of the year.

By almost any measure other than AI, the US economy and the US equity market are not especially impressive. One exception, however, has been the surprising strength of US consumer spending. Yet to some extent, that too reflects the impact of AI. After all, the wealthiest 10% of US households own most of the equities while the highest-earning 10% are responsible for roughly half of consumer spending. Thus, one can argue that, in the absence of the surge in equities, consumer spending growth would have been less impressive.

Meanwhile, US labor force growth has been extremely slow, largely due to the significant reduction in immigration. Yet sustained, strong economic growth suggests that the economy is being driven, in part, by gains in labor productivity. Moreover, we know that in recent years, a disproportionate share of labor productivity growth was due to the tech industry. In fact, productivity grew much faster on the West Coast than in the rest of the country, largely due to the concentration of the tech industry there.

Going forward, a couple of questions emerge. First, will the massive investment in AI generate positive returns in the near term? If not, could there be an equity market correction? Second, is the current rise in productivity due to the investment in AI? The answer is that the evidence suggests not. Rather, it likely reflects investment in other technologies, especially in the services sector, which faces labor shortages. That shortage is leading companies to seek labor-saving or labor-augmenting technologies

Japanese politics drive a new economic direction

• In Japan, Sanae Takaichi was elected leader of the Liberal Democratic Party (LDP), much to the surprise of predictions markets, which had anticipated victory for Shinjiro Koizumi. Takaichi is the first woman to lead the LDP, and will almost certainly be the next Prime Minister—also a first.

Thus, the Takaichi Age is beginning. Ms. Takaichi compares herself to Margaret Thatcher. Like Thatcher, she is a fan of the libertarian economist Friedrich von Hayek and believes in free markets and limited regulation. Yet, she was also a devotee of the late Japanese Prime Minister, Shinzo Abe. His policy, known as “Abenomics,” involved three pillars: fiscal stimulus, monetary expansion, and structural reforms. Many observers expect her to revive Abenomics while attempting to liberalize the Japanese economy in the mode of Thatcher.

The selection of Takaichi led to a sharp decline in the value of the yen, a rise in long-term bond yields, and a big increase in Japanese equity prices. Many investors expect Takaichi to pursue fiscal stimulus, which implies higher bond yields and, potentially, higher inflation. Moreover, there is an expectation that she may put pressure on the Bank of Japan (BOJ) not to pursue further increases in interest rates. The expectation of higher inflation and lower policy interest rates contributed to the decline in the value of the yen. Plus, the expectation that the economy could grow faster contributed to the rise in equity prices.

As for equity prices, there was a sharp rise for pharmaceutical companies, auto companies, and semiconductor manufacturers. There was an especially sharp rise for companies in defense-related industries, given that Takaichi is expected to pursue increases in defense spending. Bank stocks, however, fell on the expectation that interest rates are less likely to rise.

Polls indicate that the primary concern of Japanese voters is inflation, which remains historically high. Yet the selection of Takaichi does not signal a likely effort to quell inflation. Rather, given the unpopularity of the LDP, it is possible that the parliament members, who chose Takaichi, want to create a sense of excitement to boost support, especially if she chooses to call a new election. On the other hand, some critics suggest that Takaichi is too conservative for Japan’s current mood. In fact, the LDP’s junior partner, Komeito, is likely to exit the government as it disagrees with Takaichi’s hardline policies on defense.

As mentioned above, the selection of Sanae Takaichi as leader of Japan’s LDP, and her likely ascent to the role of prime minister, has led to a sharp rise in long-term Japanese government bond yields. That, in turn, reflects an expectation that, under Takaichi, Japan’s government could implement a more aggressive program of fiscal stimulus.  That means more selling of government bonds and, consequently, higher bond yields.

There is concern that the increase in the supply of Japanese long-dated bonds could put upward pressure on bond yields in other countries. That is because the rise in Japanese yields might lure Japanese investors to bring money back to Japan from foreign domains. On the other hand, the Japanese yen depreciated following news of Takaichi’s victory. That reflected an expectation that the BOJ will likely follow an easier monetary policy than previously anticipated.

Gold price surge tells us something about the economy

• The price of an ounce of gold hit a record high of US$4,037—up more than 54% since November 2024. Why? One reason is that China’s central bank has been buying gold at a rapid pace. This likely reflects an effort to diversify away from exposure to the US dollar. Indeed, since early this year, there has been evidence that global investors, both in the private sector and public sector, have been reducing exposure to the dollar.

There has long been an unhealthy obsession with gold. The late economist John Maynard Keynes called gold a “barbarous relic.” Gold is essentially a speculative asset, and swings in gold prices often reflect speculative influences rather than underlying supply and demand patterns. Yet gold prices can sometimes be useful indicators of issues beyond the market for gold.

Historically, increases in the price of gold often indicate growing expectations of inflation. Gold has been considered a hedge against inflation. In the United States, at least, there has been a sharp rise in consumer expectations of inflation and a more modest rise in investor expectations. Sometimes increases in the price of gold reflect lower interest rates, meaning that the opportunity cost of holding gold has declined.  Indeed, in the United States, there is an expectation that short-term rates will fall further.

Yet it seems likely that, in this case, the sharp rise in the price of gold reflects more than just expectations of inflation and lower interest rates. Indeed, the rise in gold prices has lately correlated with the decline in the value of the dollar. This is despite the surge in US equity prices, which has partly been driven by an influx of foreign money. Yet we know that foreign investors in US equities have hedged to protect themselves from dollar depreciation.

The latest on trade

• When the United States and the European Union reached a trade deal in July, there was hope that this would set the stage for a new period of stability and predictability, thereby enabling companies to confidently make supply chain investments accordingly. Yet the United States is now talking about undermining the deal because of concerns about the EU law on climate.

Specifically, the US government has asked the European Union to exclude non-EU companies from the requirement that they provide “climate transition plans.” In addition, the United States is asking the European Union to exclude US companies from a requirement to identify environmental or social costs in their supply chains.  Also, the United States has complained about the European Union’s carbon border tax, which is set to begin next year. These demands are consistent with the US government’s current stance against regulations meant to compel companies to engage in a transition to clean energy.

The United States says that the EU regulations, which were enacted last year, create “serious and unwarranted regulatory overreach,” which “imposes significant economic and regulatory burdens on US companies.” In addition, it said that the regulations mean that “extraterritorial reach, onerous supply chain due diligence obligations, climate transition plan requirements, and civil-liability provisions will adversely impact the ability of US businesses to compete in the EU market.”

It is not clear what the US will do if its demands are not met. The United States is not offering anything in exchange for the EU meeting its demands. Observers worry that US demands could lead to the undermining of the existing trade deal that was agreed upon in July. Uncertainty about the stability of the deal could have adverse effects on supply chain investment.

• The World Trade Organization (WTO) says that the impact on global trade from US tariffs will come later than previously anticipated because of stockpiling of goods in 2025 in anticipation of tariffs. The full impact will mean a sharp deceleration in goods trade. An economist for the WTO said that “the tariffs have a significant effect. It’s just the timing that has changed.”

On the other hand, the impact of the US tariffs has been softened because other countries have not retaliated. Early in this episode of trade tension, there was a significant expectation that other countries would retaliate against US tariffs, thereby having a further negative impact on trade flows. This has not happened. US trading partners have accepted that the United States will keep high tariffs regardless of what they do. Moreover, they have learned that the best way to avoid even more onerous tariffs is to promise to import more goods from the United States as well as to invest more in the United States. These promises are mostly gentleman’s agreements for which there is no enforcement mechanism.

Meanwhile, the director-general of the WTO said that “the outlook for next year is bleaker, and I am concerned. Just because we see resilience in the system doesn’t mean we are home free, because there is so much uncertainty in the system.” She suggested that trade will decline sharply in 2026, when the full impact of the tariffs likely will be felt. This, in turn, will have a negative impact on global economic activity.

The WTO also said that, although the tariffs have only targeted merchandise trade, they will have a negative impact on services trade—especially transportation and tourism. On the other hand, the WTO noted that, so far this year, the tariffs have led to a diversion of trade, which has entailed increased trade between emerging countries, many of which are attempting to reduce exposure to the United States.

• China imposed new restrictions on rare earth minerals, and not only restrictions on exports. Rather, it imposed restrictions on third parties that export magnets that have even small amounts of Chinese-produced rare earth minerals. This is similar to the Foreign Direct Product rule used by the US government to restrict usage of key technologies. In response to the new Chinese rules, the United States announced it will impose a 100% tariff on imports from China. This, in turn, led to a sharp decline in US equity prices after a prolonged bull market. President Trump said that “We import massive amounts from China and maybe we’ll have to stop doing that.”

Despite these words, the president said that the 100% tariff would not go into effect until Nov. 1, 2025. This means that there remains time to negotiate a trade agreement. Meanwhile, Trump is scheduled to meet with China’s president soon.  There is now uncertainty as to whether the meeting will take place.

Week of October 6, 2025

• US government shutdown and its implications
• Signs of financial stress for US households
• Potential impact of US plans for H1B visas
• US port fees and their potential impact
• Eurozone inflation and ECB policy

US government shutdown and its implications

• As the US government’s new fiscal year began on October 1, large swaths of the US government shut down. That is because the Congress did not pass a bill to fund the government. And that is because passage requires a supermajority in the Senate, which means that the Republican-controlled Senate cannot pass it alone. As such, Democrats are withholding support unless certain demands are met. Let me address the potential economic impact.

The reality is that a shutdown of the government does not necessarily have a substantial economic impact. That is because many government functions continue to take place. A big part of what the Federal government does involves expenditures that are not budgeted each year and are immune to a shutdown. These include payments of benefits such as Social Security, Medicare, Medicaid, and other entitlement programs. In addition, interest payments on the debt continue to be made. Moreover, the military, intelligence, security, and law enforcement functions continue to operate, although many employees of these agencies do not get paid during a shutdown even though they are required to work.

The principal impact of a shutdown is the closure of non-essential agencies and the temporary dismissal of their employees. The Congressional Budget Office estimates that a shutdown will involve furloughing about 750,000 employees of the government. Although they will be given back-pay when they ultimately return to work, the temporary loss of income has an impact on consumer spending and on the ability of these people to pay their bills, including servicing debts. The longer the shutdown lasts, the greater the impact—although even a month-long shutdown will not likely have a significant impact on the longer-term trajectory of the US economy.

One important function of the government is to release economic data that can be used by policymakers, including the Federal Reserve, in its deliberations. Data will not be released during a shutdown. Moreover, it has already been announced that the September employment data will not be released as scheduled. Absent good data, the Fed might find it more difficult to discern the state of the economy when it meets at the end of this month. That could mean indecision about whether to cut interest rates again.

On the other hand, the Fed generates some of its own data, including industrial production as well as qualitative data on the economy gleaned from its periodic surveys of business and financial leaders. Plus, the Fed can utilize access to private sector data.

The shutdown has so far not influenced financial markets, and it is not likely to happen. The shutdown has nothing to do with the ability of the government to service its debts, which is an issue that can influence asset prices. That issue arises when the Congress comes close to failing to raise the debt ceiling. That issue is no longer on the table following passage of the One Big Beautiful Act, which kicked the issue down the road. However, the high frequency of government shutdowns in recent decades likely erodes investor confidence that the Congress will ever address underlying structural imbalances in its fiscal stance.

• Although the US government did not release a report on September employment data last week, there is private sector data on employment. ADP, a payroll processing company, provides a monthly estimate of private sector employment that is often, but not always, a good predictor of the government numbers. ADP recently reported that, in September, private sector employment was down 32,000 from the previous month. ADP’s chief economist commented that “despite the strong economic growth we saw in the second quarter, this month’s release further validates what we’ve been seeing in the labor market, that US employers have been cautious with hiring.”

Notably, ADP reported that employment increased by 33,000 at large companies (those with 500 or more employees) but fell more sharply at small- to medium-sized companies. ADP also reported that employment declined in most industries with the exceptions of mining, information, and education/health care. The latter saw an increase of 33,000 jobs. In addition, ADP reported that all the job losses in September took place in the Midwest while job growth took place in the other regions.

Finally, ADP reported that, for job stayers, annual pay rose 4.5% from a year earlier, significantly higher than the rate of inflation. This reflects tightness in the job market despite no job growth. And that, in turn, likely reflects the impact of a restrictive immigration policy. That is, as demand for labor recedes, the supply of labor is receding commensurately due to lower immigration and deportations.

Signs of financial stress for US households

• At a time when US consumer spending is growing at a healthy pace, and faster than the growth of household income, it is notable that the number of households facing financial stress has grown substantially. Specifically, a large number of households are facing trouble servicing their automotive loans. Automotive lending is the second largest source of consumer credit after home mortgages. By the middle of this year, Americans had nearly US$1.7 trillion in automotive debt. This is roughly 9% of total consumer debt, including mortgages.

The share of automotive loans that are 90 or more days delinquent hit 5% in the second quarter of this year. That is only slightly below the historic high of 5.3% in 2010. In poorer parts of the United States, the delinquency rate was much higher (10% in Mississippi and 8.4% in Louisiana). Not surprisingly, younger borrowers have higher delinquency rates. And, of course, the delinquency rate on sub-prime loans has increased sharply, far faster than the rate on all loans. Specifically, the share of sub-prime automotive loans that are 60 or more days delinquent is 10% (the highest since 2008) while the share for all automotive loans is only 2%. This fact is creating anxiety in financial markets.

Recently a major sub-prime automotive lender filed for bankruptcy. While it is reported that there were specific reasons for this implosion, many investors are becoming more concerned about the state of the sub-prime market, with some worrying that there might be hidden problems among the participants in this market. This is especially true given that a large automotive parts supplier recently filed for bankruptcy as well.

Sub-prime borrowers (those with modest incomes and poor credit histories) are the most vulnerable given their weak financial cushions. When delinquencies among sub-prime borrowers rise significantly, it is often a sign of larger troubles to come with respect to household finance. If true, it could foretell systemic problems in the market for consumer finance. Indeed, the delinquency rate on credit card debt (the third biggest type of consumer debt) has risen sharply in the past two years.

Meanwhile, much of the debt held by lending institutions gets bundled and sold as securitized debt. As defaults rise, the value of the securities falls. As institutions that hold these securities mark the value to market on their balance sheets, they could be compelled to liquidate other assets to cover their losses, thereby leading to a general decline in asset values. Plus, an increased perception of hidden risk could stifle credit market activity and lead to higher risk spreads.  

Potential impact of US plans for H1B visas

• The recent decision by the US administration to impose a US$100,000 fee on new H1B visas has set off a debate about the potential impact. H1B visas are issued by the US government to companies that need highly skilled workers. Often, such skills are in short supply in the United States. The government currently issues 85,000 such visas per year. The new fee will mean a significant cost for companies, many of which might decide to offshore some processes rather than bring workers to the United States.

Although the new decision will have implications for employment trends at technology, consulting, and financial services companies, a larger impact could emerge. According to a study published by the University of Chicago, H1B visa holders contributed significantly to productivity growth in the United States. Specifically, the study found that, in the period 1990 to 2010, H1B visa holders contributed between 30% and 50% of all productivity growth in the US economy. Moreover, according to a report from the Peterson Institute, H1B visa holders are not simply employees. They are important factors of production, playing a key role in innovating in such industries as information technology, engineering, bioscience, and financial services.

Moreover, evidence suggests that, in the past, when there were changes in the number of visas issued, it had an impact on productivity growth. Specifically, the number of visas was boosted significantly in 1998 and then reduced significantly in 2004. Notably, this coincided with acceleration and then deceleration of productivity. Plus, as the Peterson Institute notes, “H1B visas cause dynamism and opportunity for natives. They cause more patenting of new inventions, ideas that create new products and even new industries. They cause entrepreneurs to found more (and more successful) high-growth startup firms. The resulting productivity growth causes more higher-paying jobs for native workers, both with and without a college education, across all sectors.”

Finally, a study published by the American Economic Association found that, in the long run, the most effective policy lever to boost productivity growth is “increasing the supply of human capital (for example, relaxing immigration rules or expanding university STEM admissions).” As such, the new decision could be one of the most impactful policy moves of this administration.

US port fees and their potential impact

• Aside from tariffs, an important trade restriction implemented by the US administration is a docking fee at US ports charged to ships that are either owned or operated by Chinese companies or were built in China. This fee is set to begin on October 14. The United States is imposing the fee due to what it sees as “unfair” competition from state-subsidized shipping in China. It is also meant to revive US shipbuilding. Given that the fee is only applied to Chinese shipping, companies and builders in other Asian countries such as Japan and South Korea see an opportunity to boost their market share.

Meanwhile, China dominates the shipping industry. It is reported that 29% of container ships on the water were made in China and 70% of ships on order will be made in China. The fees are set to be very steep and could either lead to sizable increases in the prices paid for shipping services or diminished profits for shipping companies. As such, some shipping companies have been rotating Chinese-built ships out of US-bound shipping lanes, attempting to minimize the impact of the fees. US exporters have complained that the fees could reduce their competitiveness as they apply to any Chinese ship that visits a US port, whether bringing goods to or taking goods from the United States. And US retailers, which purchase goods from Asia, are concerned about the potential impact on their costs.

China’s government has responded to the US plan, saying it will implement countermeasures against US ships. The government said that “these countermeasures include, but are not limited to, charging special fees on their vessels when calling at Chinese ports, prohibiting or restricting these vessels’ port access in China, and barring or restricting their organizations or individuals from accessing China-related maritime data or operating in international shipping and related services to and from Chinese ports.”

There remains uncertainty as to whether the United States will go ahead and implement the fees, given that the United States and China are in the midst of negotiations about permanent trading relations. It is possible that the fees will be postponed.

Eurozone inflation and ECB policy

• Inflation in the 20-member Eurozone accelerated slightly in September. The European Union (EU) reports that, in September, consumer prices rose 2.2% from a year earlier. This was up from 2% in August and was the highest rate of inflation since April 2025. On the other hand, when volatile food and energy prices are excluded, core prices rose 2.3%, the same as in each of the previous four months. Thus, underlying inflation appears to be steady.

The main reason that headline inflation accelerated is that the decline in energy prices abated. Otherwise, inflation appears to be stable. Prices of services were up 3.2% in September from a year earlier, roughly unchanged for the past five months. Meanwhile, prices of non-energy industrial goods rose 0.8%, unchanged for the past three months.

For the European Central Bank (ECB), the stability of underlying inflation at a relatively low level would appear to support its choice to keep the policy rate unchanged. Moreover, the rise in the value of the euro in the past year helps to suppress inflation by reducing import prices. ECB President Lagarde said, however, that the choice to keep rates unchanged is not “fixed.” Rather, “we are well placed to respond if the risks to inflation shift, or if new shocks emerge that threaten our [medium-term inflation] target.” She added that “we cannot pre-commit to any future rate path, whether one of action or inaction. We must remain agile, and ready to respond to the data as they come in.” Although the ECB has a single mandate to minimize inflation, the ECB undoubtedly keeps an eye on the health of the economy and the stability of the financial system.

Week of September 29, 2025

• The US announces new tariffs
• US economic growth more resilient than expected

The US announces new tariffs

• Trade disruption continued as President Trump announced, through social media, a series of new tariffs. In addition, there are reports of potential other trade restrictions. Here is what we know:

The president said he will impose a 100% tariff on “any branded or patented Pharmaceutical Product, unless a company IS BUILDING their pharmaceutical manufacturing plant in America.” He added that there will be “no tariff on these pharmaceutical products if construction has started.” This evidently does not apply to generic pharmaceuticals which account for about 90% of the pharma products imported into the United States. The lion’s share of these come from India.

Many branded pharma products, however, come from Europe. Several European pharma companies already have production facilities in the United States or are currently investing in such facilities. This will potentially enable them to avoid the new tariffs. Still, it is not clear if the exemption applies to all products made by a European pharma company investing in the United States, or just to those products that a company plans to manufacture in the United States. It is reported that companies are engaging with the United States government to obtain clarity.

Another issue is whether the trade agreement recently reached between the United States and the European Union (EU) supersedes the latest announcement on pharma products.  The deal says that all imports from the European Union will face a 15% tariff. A spokesman for the European Union said that “this clear all-inclusive 15% tariff ceiling for EU exports represents an insurance policy that no higher tariffs will emerge for European economic operators.” Still, it remains unclear if the US administration intends the new tariff on pharma products to be added to the 15% tariff. As for the United Kingdom, a government spokesman said that the announcement is “concerning.” In response to the announcement, shares in Europe-based pharma companies fell.

Shares of pharma companies in Australia, Japan, South Korea, and India fell in response to the latest announcement. The Japanese government said that it expects the trade deal between the United States and Japan, which calls for a 15% US tariff on imports from Japan, will supersede the announcement about tariffs on pharma products. Yet this was not made clear in the US announcement.

The impact of the new policy on drug prices in the United States could be muted by two facts: first, most imported drugs are generic rather than branded and, as such, are not subject to the tariff. Second, many non-US pharma companies already engage in manufacturing in the United States or are actively investing. This will mean that either some or all of their exports to the United States will be exempted. The problem now is that the devil is often in the details and not many details were provided. Thus, uncertainty remains.

In addition to the tariffs on pharma products, the president announced that there will be new tariffs on some furniture products as well as heavy trucks. Specifically, he said that there will be a 25% tariff on heavy trucks. This is meant to protect US-based truck manufacturers from “unfair outside competition.” As with pharma products, it remains unclear if this 25% tariff will be superseded by the 15% tariff on imports from the European Union and Japan. Trump also said there will be a 50% tariff on imports of kitchen cabinets and bathroom vanities as well as a 30% tariff on upholstered furniture.

These new tariffs will potentially boost the effective average tariff rate of the United States which lately has been estimated at 19.6%. The tariffs will likely boost inflation, especially for durable goods.

Meanwhile, it is reported that the US administration is considering a plan meant to boost domestic manufacturing of semiconductors and reduce US dependence on overseas supplies. Recall that this was the goal of the CHIPS Act that was passed during the Biden Administration and involved substantial subsidies to companies that build chip fabrication plants in the United States.

US economic growth more resilient than expected

• Real GDP in the United States grew faster in the second quarter than previously estimated, according to the third and final revised estimate of GDP from the government. How can we explain the evident resilience of the US economy, especially at a time of very slow job growth?

First, the government reports that, in the second quarter, real GDP grew at an annualized rate of 3.8% from the previous quarter. This is up from an initial estimate of 3.0% and a second estimate of 3.3%. This was due to a significant upward revision of growth in consumer spending, a slower decline in real business investment, and a bigger decline in imports (which has a positive impact on GDP growth).

In part, the strong growth resulted from a sharp decline in imports. Real (inflation-adjusted) imports of merchandise were down at an annual rate of 35.0% from the previous quarter. When the impact of trade and government spending are excluded, real GDP increased at an annual rate of 2.9%. When the government released its first estimate of GDP, this measure was up only 1.2%. That measure of underlying growth appeared to signal a weak economy. Now, with the revision, it appears that underlying growth was quite strong in the second quarter.

The main difference between the first and last estimates is the impact of the consumer, both through consumer spending and imports. The strength of consumer spending is somewhat surprising given the weak growth of employment that took place in the second quarter. However, real disposable personal income (household income after taxes and after inflation) increased at an annual rate of 3.1%, the fastest growth since the first quarter of 2024. This reflected strong wage gains in a tight labor market.

Also, it could be the case that households are spending rapidly in anticipation of higher prices due to tariffs later this year or next year. If true, that could set the stage for a slowdown in consumer spending growth once inflation starts to accelerate significantly. Moreover, an increase in inflation in the coming year will not only be due to tariffs. It will likely reflect the restrictive immigration policy leading to a labor shortage that drives up prices, as well as a surge in the cost of electricity due to the rapid rollout of data centers.

In any event, the evident strength of the economy might give pause to the Federal Reserve as it contemplates continuing its decision to ease monetary policy by cutting interest rates. After all, the Fed evidently chose to start easing because, although it expects a temporary boost to inflation, it worried that the economy is in danger of a sharp slowdown. With today’s revision, it will be harder to make that case. As such, there could be some spirited debates within the confines of the Fed over the future course of monetary policy. Indeed, the President of the Federal Reserve Bank of Chicago, Austen Goolsbee, said that “I’m uncomfortable with overly frontloading a lot of rate cuts on the presumption that [inflation] will probably just be transitory and go away.” The assumption of transitory inflation is based on the view that a weak economy is expected to prevent a wage-price spiral that could lead to sustained higher inflation.  Yet Goolsbee said that “we’ve still got a mostly steady and solid jobs market.” That, in turn, could help to sustain higher inflation.

• The US government reported that, in August, for the fifth consecutive month, the US personal savings rate declined from the previous month, thereby enabling household spending to rise faster than income. Indeed, this has contributed to the continued strong growth of the economy despite a marked slowdown in job creation. Meanwhile, the Federal Reserve’s favored measure of inflation indicated some acceleration, with prices of durable goods rising at the fastest pace since December 2022. This likely reflected the burgeoning impact of tariffs. Let’s look at the details:

In August, the personal savings rate (savings as a share of disposable income) fell to 4.6%, the lowest level since December 2024 and the second lowest level since December 2022. As such, although real disposable income only grew 0.1% from July to August, real personal consumption expenditures were up 0.4% from July to August. This included a stunning 0.9% real (inflation-adjusted) increase in spending on durable goods, a 0.5% increase for non-durables, and a 0.2% increase for services.

Why was consumer spending so resilient in August? Here are two possible answers.  First, equity prices have soared, boosting the wealth of relatively upscale households. Second, anticipation of the inflationary impact of tariffs might be causing households to frontload spending.

Meanwhile, the government also reported on the Fed’s favorite measure of inflation: the personal consumption expenditure deflator, or PCE-deflator. The deflator was up 2.7% in August versus a year earlier, the fastest rate of growth since February. When volatile food and energy prices are excluded, the core deflator was up 3.0% in August versus a year earlier. This was the same as in July and the highest since February.

More importantly, the prices of durable goods were up 1.2% in August versus a year earlier, the fastest rate of increase since December 2022 at the tail end of the pandemic. If we exclude the pandemic era supply chain disruption that boosted prices of durable goods, this was the biggest increase in durables prices since 1995. Also, prices of non-durables were up 0.7% while prices of services were up 3.6%. The latter has been steady for many months.

• Consumer sentiment in the United States has fallen again, according to the University of Michigan. Its consumer sentiment index fell 5.3% from August to September and was down 21.6% from a year earlier. This indicator was even lower in April and May when news on tariffs created fears. Excluding those two months, the September reading was the lowest since November 2022.

The decline in sentiment was seen across all ages, incomes, and education cohorts. The only exception was that sentiment improved for households with heavy exposure to equities.