Resilience Revealed

The US economy remains resilient, even as threats of a resumption in the trade war mount. Investors concerned about a slowing economy breathed a sigh of relief as last week’s jobs reported showed payrolls grew more than expected in June and the unemployment rate ticked lower. The details point to some weakness brewing and attention now turns to the potentially inflationary effects of higher tariffs and the question of the Federal Reserve’s next move in the face of job and price cross currents.

While job additions came in higher than expected at 147,000 in June, it was the significant drop in the size of the labor force (-130,000) that pushed the unemployment rate lower (to 4.1%). Private sector job growth slowed further in June even as that headline count came in higher than expected. Total job additions were boosted by state and local government hiring, particularly in education, although these government job gains were partially offset by a decline in federal government workers. We should expect more federal employment declines as those fired under DOGE run through severance packages and join the ranks of the unemployed.  Private sector job additions in both manufacturing and services were cut in half versus the April-May average and may reflect ongoing uncertainty surrounding coming tariffs and their impact on profit margins and consumer spending power.

Consumers continue to benefit from earnings growth. Average hourly earnings in the private sector rose again in June (by 0.2%) and are up 3.7% over the past year. That places earnings growth ahead of inflation, allowing households the ability to enjoy more goods and services than during the prior year. Consumer spending has powered economic growth since the pandemic’s onset and we saw more of that in June. The future looks less clear with higher tariffs looming.

_{^{Source: ACM Wealth}}

Last week also saw passage of a new federal budget which brings with it an extension of personal income tax cuts passed during the first Trump administration. It layers on some additional tax cuts (e.g. on some tips and overtime), more advantageous deductions for corporate manufacturing investments, higher spending on defense and on immigration control, and significant cuts to Medicaid and food assistance. This law is expected to increase the US federal debt by roughly $4 trillion over the next decade (inclusive of higher interest payments). The hope is that upcoming efforts, such as through deregulation and a more conducive environment towards M&A, will boost growth and tax revenue.

President Trump signaled last week that high “reciprocal” tariffs, paused in April, may very well be imposed on goods from countries that have failed to reach a deal with our trade negotiators by the July 9^th end of that pause. Very few deals have thus far been announced with the 57 countries originally included on the list. New tariffs may, however, bring in greater government revenue to offset the higher deficit spending plan as US buyers of imported goods pay a tax to the US government on those imports. Current estimates suggest those revenues could be as much as $300 billion, which could help offset, though in a small way, the coming higher federal debt interest payments (interest of $1 trillion in 2024 and set to move higher as the deficit expands). Note also that those tariffs are being implemented in the hope that companies will find it advantageous to shift manufacturing from abroad to the US. That, of course, would mean less in tariff revenue but the hope is that they could create more jobs and boost domestic GDP.

By increasing the prices that consumers and firms pay for imports (and the likely increase in prices of domestic substitutes), the US is expected to see a (hopefully) temporary increase in inflation over the next several months. This is the risk that Fed Chair Jerome Powell articulated in recent statements. This risk is likely to keep the Fed from cutting rates at its next policy meeting in July and potentially again in September. Meanwhile, this risk likely prevents the Fed from helping to mitigate any slowing in US economic hiring or growth, since to cut rates to stimulate the economy would only exacerbate the inflation threat. For now, the economy remains resilient. Hiring is tepid, but not alarmingly so, and US GDP looks set to expand in the second half of 2025 at a modest pace of around 1.0%, not atypical for a mature economy.

Equity markets are likely to be more sensitive to the upcoming earnings reports for the June quarter, as firms signal their approach to navigating the uncertainty around tariffs and whether they can pass on those tariff increases to consumers or must absorb the hit in lower profit margins. One powerful growth driver remains in place and is a broad one: investments in the infrastructure behind the deployment of artificial intelligence. This is boosting sales and profits of companies from the chip industry to utilities. Even as investors prepare for tariff-related risks by owning economically resilient companies, they should not neglect the appreciation boost available from such engines of growth.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.