The secret diary of an economist aged 49¾

Wednesday 30 July:  

After overselling the ‘critical’ data deluge in the first of too many to mention Teams* calls at the start of the week, the numbers have been largely as expected. The 3% US Q2 2025 GDP print exaggerates the underlying strength, but is likely the final nail in the coffin on my below consensus view on US growth. 1% in the second half of the year looks increasingly reasonable. Financial conditions and sentiment have improved, the fog around tariff levels is beginning to clear and fiscal policy is set to provide some support. My earlier fear of tariffs and general uncertainty causing a recession are so far proving unfounded.

I commute home to cover an uneventful Fed meeting in the evening. My preview was close enough to the outcome, so no further burning of credibility. The market was slightly disappointed that “Too late” Powell did not give a firmer steer towards an interest rate cut in September. I think Powell is doing well under the circumstances. 

I keep going to hear the earnings from Meta* and Microsoft*. The market loves them and quickly forgets about the minor Fed disappointment. It feels similar to the tech mania of the late 90s. One contrast is these companies are rapidly growing profits, but partly as they spend tens of billions on each other and then depreciate the cost slowly. How many times can people watch trampoline bouncing rabbits on Facetok and Yougram before it destroys rather than enhances productivity? I hope to work this all out before AI takes my job.

Thursday 31 July:

Economics Roadmap day. Today is one of eight times a year that we formally update and present our thinking on the economic outlook across the firm. I use the term loosely because I don’t really know what is going to happen next. This is also the chance for the economists to showcase our analysis and any disagreement with consensus views. Instead, I reluctantly further reduce my probability of the US going into recession over the next 12 months to 30%.  

It is much more enjoyable when consensus moves to my view (April was really FUN) than the other way around. So now we don’t have any non-consensus views worth highlighting. I dislike being on the fence, but our models are unable to calibrate the impact of tariffs,  the implications of AI, or President Trump’s decision-making process

Friday 1 August:

Woke up sore from my Team Time Trial to the overnight news from the White House detailing Liberation Day 2.0 tariffs. There will probably be a few more deals announced to reduce some of the high rates. The main takeaway is the rest of the world has chickened out and not retaliated to US mercantilism. 

I send the email update out ahead of our investment meeting and payrolls, while praying I had not miscalculated the effective tariff rate which is now heading to almost 20% by the end of the year, assuming sectoral tariffs on pharmaceutical and semiconductors. I am guessing the amount of revenues raised will be nearer 15% because there is a strong incentive to under report imports and tariffs will probably lead to some demand destruction. I still think the impact on inflation from tariffs has been delayed and not averted. The next few CPI prints could make life even harder for the Fed.

Payrolls is a shocker for markets with unusually large downward revisions to the data. Employment growth is now only 35k on average over the last three months. So I cancel my WFH tee-time and prepare a briefing. I think I said payrolls is a random number on the morning call. Perhaps I could have taken a bolder stance, but too late now. If there is one thing that annoys portfolio managers about economists (among several) it is to claim we saw something coming with hindsight. 

The numbers are still not terrible. With immigration collapsing, payrolls probably only need to grow by 50k a month to keep the labour market in balance and unemployment steady. The real question is whether this presages further weakness or was just a hiring pause due to tariff uncertainty? Officially I am now in line with consensus. 

I tell my wife that I was surprised to see some Wall Street economists voice their concerns about President Trump firing the head of the Bureau of Labour Statistics because he disliked the employment report. Integrity of the data is critical. Any hint of politicising the data could undermine the lofty valuations of US assets in my view. She encourages me to keep telling the truth in my media work and thanks me for renewing my life insurance policy.

After the Test Match Cricket highlights there is another ‘tape bomb’ with Fed Governor Kugler resigning before her term expires in January. I reckon I can write some good blogs on the potential erosion of Fed independence. It could be a big story, but my instinct is the institution holds firm under fire.

 

* For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.