In the immediate aftermath of Friday’s much anticipated Employment Report it seemed like the judgement from analysts, talking heads, and even markets was unanimous (or nearly so) that there was good news to celebrate.

In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."

Looking back on it, the first quarter of the year was a complete anomaly. Real GDP declined at a 0.2% annual rate, and the left side of the political spectrum said this proved current policies were a disaster.

The Federal Reserve held rates steady today, while also projecting slow economic growth, higher unemployment, and higher inflation. And while the Fed signaled that two further rate cuts are still their base-case for the remainder of 2025, the timing of those cuts remains up in the air.

The United States consumes a large share of its GDP; China, not so much. The result is Yin and Yang. On net, China produces and the US consumes.

Back during the Financial Panic of 2008, clickbait media kept screaming “Hyperinflation.” We consistently pushed back against this theme, and argued inflation would not accelerate.

Conventional wisdom was that the tariffs imposed by the Trump Administration would cause higher inflation and slower growth – stagflation as far as the eye could see. But this past week brought economic news that defied this prediction.

Moody’s finally downgraded US government debt on May 16th to Aa1, its second highest rating. With the US $36 trillion (and rising) in debt, it’s not hard to see why. But Moody’s was late to the party with S&P and Fitch (the other two major ratings agencies) having done so long ago.

Milton Friedman, Art Laffer and other market-believing economists had their long day in the sun during the 1980s and 1990s. Tax rates fell and government spending declined relative to GDP. But – ironically, in the long run, and long after he passed away – John Maynard Keynes got his revenge.

Back on January 10, 2025, it cost $1.024 to buy one Euro. Last Friday, the $/Euro exchange rate was $1.125 – a drop in the value of the dollar of about 10%. Similar moves in the value of the US dollar versus the British pound, Japanese yen, and Canadian dollar also occurred.

The Federal Reserve held rates steady today, while emphasizing that elevated uncertainty has clouded the path forward. If, when, and how much tariff policy will change in the months to come will play a large part in dictating the next move for the Fed.

Noise about tariffs, business uncertainty, a constitutional fight, and a drop in stock prices had already created fear of a recession. When real GDP declined in the first quarter of 2025, some started to question if a recession is already here. Let’s take a deep breath and consider the facts.

As we have written…The Era of Easy Everything is ending. Part of this involves bringing inflation back to the Federal Reserve’s target of 2.0%. We could debate that number, but the Fed is getting closer.

We’ve expected a recession for more than a year now. Simply put…the Era of Easy Everything is Over. Expanding deficits and easy money (that have lifted the economy since COVID) are no longer with us. At the same time, tariff negotiations have created an unbelievable amount of uncertainty.

In this week’s installment of “Three on Thursday,” let’s explore some of the dynamics surrounding the United States dollar. In an era of inflation, massive debt, large deficits, and threats of tariffs, there are persistent rumors circulating that the dollar is at risk of losing its reserve currency status.

We think it’s important for the Fed to move gradually. The US dollar has weakened lately, and, as a result, there is little case for a drastic loosening of monetary policy. The Fed could let up somewhat on bank regulations and capital requirements, which would help the struggling bond market.

The Federal Reserve started raising short-term interest rates three years ago and the M2 measure of the money supply – what Milton Friedman said to focus on – soon started declining, hitting bottom in late 2023.

During the ten years prior to COVID, PCE inflation, the Fed’s preferred measure, averaged about 1.5% per year. Jerome Powell said it was too low and he wanted inflation to “average” 2% over time.

In spite of severe polarization on so many issues, there is at least one thing that Americans agree on across the entire political spectrum, left, right, and center. That is: At some point in the past sixty years, or so, something major went wrong with the US economy and it is still causing problems today.

The Federal Reserve held rates steady today, but downgraded the outlook for economic growth in the year ahead. Policy changes in Washington, looming tariffs, and a cautious consumer have made “uncertainty” the new favorite word in the Fed’s vocabulary.

Every so often we hear a theory that makes sense superficially but on closer examination doesn’t add up. The most recent one is that the Trump Administration wants a recession (or at least wouldn’t mind one) because interest rates would drop, making it easier to service the national debt.

It is true that tariffs are a tax. It is also true that tariff policies have been volatile…on and off again…different carve outs…different countries…phone calls that change things. All of this clearly has an impact on the market. So, we are not surprised to see stock market volatility.

Is the US already in recession? Probably not. But in the first quarter, real GDP is very likely to have a minus sign in front of it. Yes, a negative reading for real growth!

We have called inflation “political kryptonite” because it is so damaging to politicians. Clearly, inflation played a role in the 2024 election. So now that President Trump sits in the Oval Office, his opponents have been trying hard to link anything and everything in his agenda to inflation.

The Framers of the Constitution designed our government to be small. Not so small and weak as the one under the Articles of Confederation, which the Constitution replaced, but small nonetheless.

The federal government gets a great deal of grief when it issues economic reports and it’s not hard to see why.

The Federal Reserve made it clear on Wednesday that it’s not about to cut short-term interest rates again anytime soon, which is good news if you’d like to see the Fed live up to its goal of bringing inflation down to 2.0%.

Following 100 basis points in rate cuts through the back half of 2024, the Fed started 2025 with a pause, placing itself in wait and see mode for the foreseeable future.

We still believe the odds of a recession are higher than most investors think. Monetary policy tightening started back in 2022 and inflation remains above the Federal Reserve’s 2.0% target, which means the Fed will be reluctant to get loose anytime soon.

As economists and financial market forecasters, we are constantly amazed at how so many people analyze, forecast, research, and discuss important topics without ever addressing the elephant(s) in the room.

If you’re going to remember one important fact about the housing market, it’s that with the brief exception of COVID, the US has consistently built too few homes almost every year since the housing bust got rough in 2007.

The College Football playoffs included 12 teams this year and all five automatic berth teams (because they won their conference championships) are now out, including the top two ranked teams, Oregon and Georgia. It wasn’t supposed to turn out this way, and the debate about why has only just started.

Jimmy Carter, the thirty-ninth president of the United States passed away this weekend, at age 100, the first former president to ever reach that milestone.

The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken.

The Federal Reserve cut interest rates for the third time this year but signaled the path forward will likely be more gradual – and less certain – than previously forecast.

The most fun anyone has had at a Jerome Powell presser was when a reporter asked about President Trump removing Powell from his job.

Why hasn’t tighter monetary policy caused a recession? One reason: federal budget deficits have been huge.

It’s hard to keep track of all the theories about inflation. Remember policymakers and analysts blaming the surge in inflation in 2021-22 on supply-chain disruptions, too much government spending, and Putin invading Ukraine? Now some are saying that tariffs and deportations are going to cause a second surge in inflation.

he Tax Cut and Jobs Act (TCJA) was passed in 2017, otherwise known as the Trump Tax Cuts.

In our lifetimes, the best comparison for Trump’s election win is Ronald Reagan’s in 1980. That election, like this one, pitted big spenders and champions of government against tax cutters and critics of government.

The new Trump Administration hasn’t wasted any time since last week’s election win, with new information around economic policy and staffing appointments making news on a daily basis. In our opinion, the recent announcement of a new Department of Government Efficiency or “DOGE” headed by Elon Musk (who obviously came up with this name and acronym) and Vivek Ramaswamy, has been the most important so far.

The Federal Reserve cut short-term rates by a quarter percentage point last week, like pretty much everyone expected. In addition, the Fed didn’t push back hard against market expectations of another quarter-point cut in mid-December, so unless the economic or financial news changes dramatically by then, expect a repeat at the next meeting.

While investors and institutions were digesting the results of Tuesday’s elections, the Fed was meeting to determine the path forward for rates. Following on the 0.5% (50 basis points) start in September, the Fed cut rates by a further 0.25% today and the markets are forecasting another cut to come in December, but the odds of that move have ticked lower.

It’s almost over! Unfortunately, those texts might not stop right away. Unless this election is an unexpected blowout, some key states won’t have full counts of all their ballots for several days.

To paraphrase Milton Friedman: There are four ways in which you can spend money. You can spend your own money on yourself. You can spend your own money on somebody else. You can spend somebody else’s money on yourself. Finally, you can spend somebody else’s money on somebody else.

With third quarter GDP being reported next Wednesday – less than a week before election day – the US is still not in recession.

There are two types of economists in the world…demand-siders and supply-siders. Without digging too deeply, one huge difference shows up in government policy.

The federal debt is already $35 trillion and currently rising by roughly $2 trillion every year – with no end in sight. As a result, some investors are worried that the US could become a 21st Century version of Argentina: completely bankrupt and unable to pay the bills.

Like it does once every year, last week the Commerce Department went back and revised its GDP figures for the past several years. And while the top line revisions to Real GDP were pretty small, there was a larger revision to corporate profits.

With only one week left in the fiscal year, it looks like the budget deficit for the federal government for Fiscal Year 2024 is going to come in at about $1.9 trillion, which is 6.7% of GDP.