The Return of Stagflation

 The Mortgage Corner

“From the same month one year ago, the PCE price index for June increased 2.6 percent. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago.” BEA.gov

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President Trump hasn’t succeeded in convincing the Federal Reserve to cut interest rates or fired Chairman Jerome Powell just yet. So he fired the head of the Labor Department’s Bureau of Labor Statistics without cause that published the weak July unemployment report instead.

It is heralding another era of stagflation that has destroyed the wealth of too many Americans.

It now looks like he wants to recreate what happened to two other Republican Presidents—manipulating the data to disguise the fact that looming inflation can be a big problem as it was in the stagflation of the 1970s and housing bubble and Great Recession of 2008 that was the worst economic downturn since the Great Depression.

President Nixon first tried it when combatting the looming oil price-inspired inflation from the Arab Oil Embargo by fixing prices to keep them artificially low, then pushed his Fed Chair Arthur Burns to keep interest rates low in the face of slowing economic growth caused by the OPEC embargo.

It resulted in 14 percent inflation in 1980 that caused then Fed Chair Paul Volcker to raise the Fed Funds rate to 20 percent, resulting in two recessions early in President Reagan’s tenure.

President GW Bush also tried it in 2000 by pushing then Fed Chair Alan Greenspan to keep interest rates low to finance his wars on terror. Greenspan held interest rates too low for too long, which resulted in the housing bubble and Great Recession that followed.

And now Trump is looking for a successor to the Senate-vetted BLS official, Dr. Erika McEntarfer, who will manipulate employment statistics for him. The result will be less trusted unemployment reports, masking the effects of historically high tariffs that will again create product shortages and slow economic growth.

The Labor Department’s unemployment report understated what happened in the past three months, as I said last week. The U.S. economy created 73,000 nonfarm payroll jobs, but just 19,000 and 14,000 payroll jobs in revisions to May and June totals when more data came in (see graph).

The change in total nonfarm payroll employment for May was revised down by 125,000, from +144,000 to +19,000, and the change for June was revised down by 133,000, from +147,000 to +14,000, per the BLS.

Trump’s main reason for wanting to manipulate economic facts? He also wants to hide the damage to the employment numbers from what could be the loss of one million immigrants leaving the adult labor force, many of them running for cover because of the Gestapo tactics of Trump’s Homeland Security masked Storm Troopers breaking into homes and businesses to round up as many undocumented immigrants as possible, as I said last Friday.

It’s really the first indication of the immigrant’s importance in our economy, and why most of July’s hiring was in healthcare (55,000) while government employment lost 12.000 jobs and -87,000 jobs this year.

The next economic shoe to drop will be the changing of the guard at the Federal Reserve. Trump could not bully Fed Chair Powell to lower interest rates sooner, but that will soon change when he appoints a new Fed Chairman.

He will want to politicize the Fed as he is doing to the rest of the federal government when Powell steps down next year, so that he can enact more Republican ‘trickle down’ economic policies first initiated by President Reagan: in particular the tax cuts + deregulation that supposedly increases efficiencies and productivity, but instead increased corporate CEO pay to more than 300 times that of their employees while weakening union collective bargaining laws.

The results of ‘trickle-down’ economics have been frightfully obvious for decades. The Reagan-era creation has succeeded in maximizing profits of the owners of capital and corporate CEOs while suppressing incomes of salaried workers via right to work laws and low minimum wages, mostly in the poorest Republican controlled red states.

It’s why economists are now calling this the second Gilded Age. We are seeing the results—higher inflation and slowing economic growth once again unless a majority of Americans can be convinced to stop the steal of the worst robber baron of all.

Harlan Green © 2023

Follow Harlan Green on: https://twitter.com/HarlanGreen

Why Weak Employment Report?

 Popular Economics Weekly

“Total nonfarm payroll employment changed little in July (+73,000) and has shown little change since April. The unemployment rate, at 4.2 percent, changed little in July. Employment continued to trend up in health care and in social assistance. Federal government continued to lose jobs.” BLS.gov

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The Labor Department’s unemployment report actually understated what happened in July. The U.S. economy created 73,000 nonfarm payroll jobs, better than prior months when  just 19,000 and 14,000 payroll jobs were created in sharp revisions to May and June totals as more data was available.

The change in total nonfarm payroll employment for May was revised down by 125,000, from +144,000 to +19,000, and the change for June was revised down by 133,000, from +147,000 to +14,000, per the BLS.

The main reason? It’s estimated that as much as than one million immigrants left the adult workforce, many of them running for cover because of the Gestapo tactics of Trump’s Homeland Security masked Storm Troopers breaking into homes and businesses to round up as many undocumented immigrants as possible.

It’s really the first indication of the immigrant’s importance in our economy, and why most of July’s hiring was in healthcare (55,000) while government employment lost 12.000 jobs and -87,000 jobs this year. The manufacturing and wholesale trade sectors also lost jobs.

Since January, some 402,000 people have left the "civilian labor force." That is, they don't have a job and are no longer looking for one, reports MarketWatch’s Jeffry Bartash.

A separate number, called "not in labor force," is even worse. The total has risen by 1.5 million in the first seven months of 2025, an unusually large increase. The last time the economy experienced a similar phenomenon, excluding the pandemic era, was during the recession of 2007-09.

The Trump administration has not been creating many jobs since January, with 158,000 jobs its high point added in April, vs. 323,000 payroll jobs added in December 2024, the last month of the Biden administration, and it’s been downhill for Trump since then (see graph).

In fact, it looks like the Trump administration is doing everything in its power to discourage businesses from hiring as Trump continues to waffle on trade agreements in attempting to look strong when in fact it’s a sign of weakness.

It should be obvious now that he is desperate to levy higher import taxes on as many countries as possible to pay for the huge increase in federal debt caused by his big, beautiful tax cuts.

The weak job report should mean the Fed will initiate interest rate cuts in September, if not sooner, if the job market continues to deteriorate. Fed Chair Powell has said that their main concern is a healthy job market and it doesn’t’ look like this can happen with so many leaving the working population.

Longer term interest rates have plunged on the jobs news, anticipating lower inflation ahead because of the weak job reports, which makes it even easier for the Federal Reserve to ease credit conditions.

Trump’s tax cuts while pushing for lower interest rates to compensate for the economic damage his tariff wars will cause are part of the Republican playbook. And Trump has declared a tariff war on the whole world with no idea of the havoc it will create for the world’s economies, much less ours.

This may be the first sign of what is to come.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Second Quarter Growth No Big Deal

 Financial FAQs

“Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2025 (April, May, and June), according to the advance estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP decreased 0.5 percent.” BEA.gov

BEA.gov

The big jump in second quarter economic growth wasn’t a surprise. Consumers continued to shop but bought fewer imported goods because Trump's tariff wars were already raising prices. Imports are a subtraction in the GDP equation.

It might be a one time jump because consumers are saving more and buying less these days, as I’ve been saying, while waiting to see how much damage the Trump tax cuts and higher tariffs might wreak on the U.S. economy, especially to those it will harm the most.

The two-month GDP average was a 1.3% growth rate. The U.S. economy expanded at a 2.8% rate in 2024 and 2.9% in 2023 under President Biden, which was in large part because of the New Deal legislation that pumped $billions into economic growth and caused higher inflation.

The Fed then raised their interest rates to bring inflation back down to its present mid-2% range, and Republicans took over the congress. The result was Trump initiated his tariff wars and passage of the big beautiful big tax bill that will increase the federal debt by some $4 trillion.

But because at least some of the additional federal debt must be paid for to preserve the no longer great faith and credit of our economy, Trump has raised tariff rates to 15-20 percent, which means raising taxes on U.S. consumers and businesses.

And as any economist will tell you, taxes slow economic growth, regardless of what Trump and his cabinet cronies say. And our economy is slowing. The so-called final sales of consumers and businesses increased just 1.2 % in Q2, and there is no indication that it might pick up as the tariff agreements (i.e., taxes) are finalized.

Inflation has declined because of less spending. Consumers spending as measured by the personal consumption expenditures (PCE) price index in the Q2 GDP report increased just 2.1 percent, compared with an increase of 3.7 percent. Excluding food and energy prices, the PCE price index increased 2.5 percent, compared with an increase of 3.5 percent because consumers bought ahead of the price increases due to the April 2 tariff announcements.

What about those Federal Reserve interest rate cuts that Trump wants? Fed Chair Powell said at his latest press conference after the July FOMC meet that its twin mandates of price stability and maximum growth are still in balance, so there’s no reason to lower interest rates at this time.

The unemployment rate remains stuck at 4.1-4.2 percent because the mandates are in balance. Powell said the Fed would act to lower interest rates sooner—i.e., ease credit conditions--if the unemployment rate were to increase substantially.

The Trump administration’s agenda paints a sordid picture in following a very similar trajectory of the GW Bush administration—with its wars on terror (like Trump’s tariff wars), huge tax cuts for the wealthiest and less regulation (like Trump’s big beautiful bill) fueling what became the Great Recession.

Trump’s tariffs won’t help the very people in the red states that elected him but raise their prices. His cuts to social services harm those in red states in the most need. His DOGE cuts are not only endangering air travel, but disaster relief when the worst storms are also happening in mainly red state territories.

So, its not even the blue states that Trump wants most to harm, but his own MAGA supporters that will suffer the most. It’s what bullies do, prey on the weakest and most vulnerable, especially immigrants and minorities that are least able to protect themselves.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The EU's New Trade Deal

 Popular Economics Weekly

“This will hurt the world economy, with the burden falling mainly on lower-income Americans. The Yale Budget Lab estimates that Trump’s tariffs will leave the U.S. economy 0.4 percent poorer in the long run, which is very close to my own back-of-the-envelope calculations.” Paul Krugman

Evelyn Hockstein | Reuters

I quote Paul Krugman again as with Trump’s Japan trade deal because it is also Trump’s usual smoke and mirrors—lots of promises but little substance. Why are markets relieved that Trump’s announced 30 percent EU retaliatory tariffs are now 15 percent, when retaliatory tariffs are illegal according to the Foreign Trade court?

Because it means less chaos and more predictability for the moment, but only for the moment.

Neither the EU nor Americans are better off with the new 15 percent tariffs levied on EU products, but none on U.S. exports to the EU. And it will once again shift more of the burden of paying off the tax cuts that benefit Trump and his buddies “onto poor and working-class families,” per Krugman

There is a very small trade imbalance when services as well as goods are included in our trade with the EU, despite Trump’s claims there’s a huge trade deficit. And U.S. exports to EU have just a 1 percent tax at present, so there’s no discrimination.

The biggest lie of all is Trump’s attempt to disguise the fact that a tariff isn’t an import tax, when it is levied at the U.S. Custom ports on goods entering the U.S., not elsewhere.

“…the tariffs are basically a sales tax that will reduce real income for poor and working-class families by about 1.5 percent, even as cuts in other taxes raise income for the wealthy,” says Krugman.

The trade deals are also hiding the fact that neither Japan nor the EU requirements for investing in the U.S. are specific enough.

The tariffs on EU manufactured autos will be lower than those manufactured in the U.S. and Canada, for instance, as with Japan. And the investment guarantees don’t specify whether they will result in actual factories.

So what are the Europeans really paying for? Protection. They have promised to buy more American weapons and keep Trump on their side in the Ukraine war that requires U.S. weapons to stop Putin and end the war.

There is much more to Trumponomics, Trump’s economic agenda, that I will cover in future columns. His insistence on cutting interest rates resembles GW Bush’s push to have then Fed Chair Alan Greenspan’s Governors keep interest rates artificially low to pay for his wars on terror. The inflation rate then was higher, in the 3-5 percent range.

I believe we will see inflation rise to a similar range when the tariff taxes really begin to take effect and kick in the slower growth plus higher inflation formula that prevailed during the Greenspan era at the Federal Reserve, and led to the Great Recession.

Trump contends the U.S. will no longer be paying as much to defend Europeans. Their smaller defense budgets made it possible for Europeans to afford their universal health plans and better social services, higher minimum wages, paid leave and mandated vacations.

The problem with having a conman as our president, is that most Americans won’t benefit from the cutbacks in military aid to the EU. We aren’t reducing our military budget but increasing it, while reducing our already underfunded social safety net, including social security.

What happens when the smoke clears and ordinary Americans realize that we have been short changed?

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Japan Tariffs

 Financial FAQs

“It has been clear for a while that Trump and co. don’t understand or believe in balance of payments accounting, that they want both a smaller trade deficit and more foreign investment in America. Now their basic lack of understanding is embodied in a specific deal.” Paul Krugman

FREDtradedeficit

Why not quote Paul Krugman, who won a Nobel Prize for his research on foreign trade? The just announced trade deal with Japan is another illustration of the Trump administration’s ignorance of basic economic principles that will make both countries poorer.

It’s necessary to get into the ‘weeds’ of economic principles for those that want to understand just what the Trump administration is really up to; enriching the few with tax cuts that are paid for by all Americans in the higher prices that will result.

Although Japan will be building more factories in the U.S. with its $550 billion in announced investments and be able to export more Japanese vehicles to Americans, U.S. autoworkers will be hurt because Japanese autos will be cheaper than vehicles manufactured in the U.S, even with the 15 percent tariffs levied on them.

Why so? Because the parts imported and used in U.S. manufactured autos have higher tariffs, such as the 50 percent tariff on imported steel and aluminum products that go into American-made autos. That’s why the U.S, Autoworkers Union will have something to say about such a tariff agreement that will endanger the livelihoods of Ford, Stellantis, and GM’s unionized autoworkers.

GM President Mary Ybarra just announced that $1.1 billion of its $2 billion net income from second quarter earnings will be ‘eaten’ by the higher tariff costs that GM didn’t want to pass on to consumers.

The FRED graph illustrates the ups and downs of the historical trade imbalance of goods and services. The downward trending red line basically tracks the negative gap between imports and exports. It has been trending down because we are a consumer-driven economy that has imported much more than American businesses export.

The deepest trade deficit (steep drop in red line) occurred with a surge in imports January-March 2025 to get ahead of Trump’s threatened reciprocal tariffs on April 2. But when he announced the reciprocal tariffs—China’s was 145%, for instance—imports dried up and the difference narrowed so that the graph line rose quickly to the $60 to $70 billion historical trade deficit.

It's an illustration of the incredible gyrations that such chaos injects into foreign trade with Trump’s negotiating tactics, and which hurts small businesses most that depend on imports for consumer products, as well as retail giants like Walmart and Target.

The earliest effect on tariff-induced inflation apppeared in the Consumer Price Index (CPI) I reported last week. The prices of retail goods and services rose to 2.7 percent in June from a four-year low of 2.4 percent, which is why the Fed is still on hold with further rate cuts. It fears that lowering their Fed funds short-term rate could trigger an inflation panic, since it would speed up economic activity.

This would in turn panic bond holders who fear higher inflation and demand higher rates that control mortgages and yields on Treasury securities that fund the national debt, when the annual debt payments are $1 trillion.

Consumers can tolerate some higher inflation and maintain spending if the job market is good. Retail sales just rebounded in June and initial jobless claims for unemployment benefits are down again. Should the unemployment report remain in the low 4.2-4.3 percent range, consumers can keep spending despite uncertainty. But confidence polls are showing consumers are beginning to see the ultimate cost of higher tariffs—reduced social services and a worsening climate.

And this is before the appeal by the Trump administration of the Foreign Trade Court ruling that all reciprocal tariffs must be approved by the congress is decided! How is anyone to know what the final tariffs will be, in that case?

And how can he keep his promise to lower inflation while he keeps hounding the Fed to lower interest rates sooner (that would boost inflation)? He can’t keep his promise, in a word, because of his need to cut taxes. So he will raise everyone’s cost of living to pay for tax cuts that will benefit the few.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Second Quarter Growth Estimates Decline

 Popular Economics Weekly

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 is 2.4 percent on July 18, unchanged from July 17 after rounding. After this morning’s housing starts release from the US Census Bureau, the nowcast of second-quarter real residential investment growth decreased from -6.4 percent to -7.0 percent.” Atlanta Federal Reserve Bank

AtlantaFed

The Atlanta Fed’s GDPNow estimate of second quarter growth is why the Federal Reserve may drop interest rates at their September FOMC meeting if estimates for second quarter growth continue to decline (green line in graph). There is hope that the second quarter would look better than Q1’s negative -0.5% shrinkage. But that was based on the premise that there would be actual tariff agreements.

And now Trump is threatening Brazil with 50 percent tariffs over ex-President Bolsanaro’s criminal conviction.

We will see the first official estimate of second quarter economic growth on July 31, but most economists are warning of the uncertainty affecting growth predictions. The DOGE cost-cutting was meant to increase efficiency, but in fact is reducing it by eviscerating programs that only the federal government can do.

Much of it is being cut from scientific research that is the seed corn for the future prosperity and safety of Americans, for instance. There are large cuts in Health & Human Service for future disease cures (medical research), the USEPA in climate research, and even climate forecasting. FEMA cost-cutting made it slow to respond to the Kerrville, Texas flash flood, and unprepared to save more lives.

The Conference Board’s Index of Leading Economic Indicators (LEI) that predicts future growth is also turning negative, despite Republican touts that Trump’s just passed Terrible Tax Bill will boost growth from the many tax breaks and reduced regulations being handed to corporations.

“The US LEI fell further in June,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “For a second month in a row, the stock price rally was the main support of the LEI. But this was not enough to offset still very low consumer expectations, weak new orders in manufacturing, and a third consecutive month of rising initial claims for unemployment insurance.”

Stocks have been rallying of late on the belief that TACO Trump will ultimately relent on many of his tariff threats that would boost inflation and reduce the likelihood of lower interest rates that businesses and consumers have been hoping for.

Consumers will still be the final arbiter of Q2 growth since they make up 70 percent of GDP, and they are now timing the tariff announcements. Retail sales had declined in May but picked up in June when it looked like any tariff hikes would be delayed once more.

Lower tariffs would certainly be better for future growth, since consumers also like it that way.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

When Will Housing Recover?

 The Mortgage Corner

“Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year,” John Williams, New York Fed President.

 

NPR

Such remarks mirror what many of the Fed Governors who vote on interest rates are saying. Expectations for higher interest rates abound as a result of the inflation expectations. It’s why the housing market may have to wait until next year to recover. The 30-year fixed mortgage rate is still hovering close to 7 percent, which is keeping first-time buyers out of the housing market and elevating rental rates.

There are other reasons to wait, of course. The housing shortage, a lingering victim of the slow recovery from the Great Recession’s busted housing bubble, is keeping home prices from declining.

And President Trump’s on-and-off attempts to bully Fed President Jerome Powell and the 12 Fed Governors to lower interest rates isn’t succeeding, despite Trump’s daily insults.

It’s another version of TACO Trump’s negotiating skills. He only knows how to bully, which is why he has left a trail of bankruptcies and lawsuits throughout his business career. But Trump keeps denying he is about to fire the Fed Chairman that he appointed in his first term.

It’s also why Trump and his allies claim tariffs are not causing inflation, and the president saying, “inflation is dead” so he can justify his push for rate cuts. Trump has called on the Fed to slash interest rates by as much as 1%, with the Fed’s benchmark rate still in the 4.25%-4.5% range.

That will ultimately happen because there is almost unanimity among economists that the tariffs will make everything more expensive, which will ultimately slow growth enough to require the Fed to act.

Realtors and some economists are also calling for lower mortgage rates to strengthen the housing market. Mark Zandi, chief economist of Moody’s Analytics is worried “Housing will … soon be a full-blown headwind to broader economic growth,” he wrote in a post on X and LinkedIn, “adding to the growing list of reasons to be worried about the economy’s prospects later this year and early next,” as cited by MarketWatch.

There is a slight hope that home sales might improve this year, according to the National Association of Realtors (NAR). Pending home sales—that are homes under contract but not closed—increased by 1.8% in May from the prior month and 1.1% year-over-year, according to the National Association of REALTORS® Pending Home Sales report.

"Consistent job gains and rising wages are modestly helping the housing market," said NAR Chief Economist Lawrence Yun. "Hourly wages are increasing faster than home prices. However, mortgage rate fluctuations are the primary driver of homebuying decisions and impact housing affordability more than wage gains.”

Existing-home sales have been stagnant for years, hovering around 4 million annual sales since January 2022 when the Fed first began to raise interest rates, but were up +0.8% from April to a seasonally adjusted rate of 4.03 million in May 2025. Sales declined 0.7% year-over-year, however.

When will builders have enough confidence to build more homes, including affordably priced homes? New home sales, which constitute approximately 13.4% of all US home sales, dropped 13.7% in May 2025 to a seven-month low of 623,000 units. This decline was the largest since June 2022.

Builder confidence in the market for newly built single-family homes was 34 in May, down six points from April, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This ties the November 2023 reading and is the lowest since the index hit 31 in December 2022.

Interest rates must eventually come down because as Mark Zandi says, poor housing sales are already a “full-blown head wind” to higher growth and the Fed will have to act to counter the added ‘head wind’ from the tariffs.

But how long must we wait for that to happen, and will it be soon enough to prevent something even more serious from happening?

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen