Charles Steindel

State labor markets were little-changed in August. Utah saw a statistically significant increase in payrolls and DC saw a drop. No other state had a significant change.

The unemployment rose a significant .2 percentage points in Delaware and Maryland, while increasing .1 percentage point in Minnesota. Colorado’s rate fell .3 percentage point, and Alabama was down .1.California. The highest unemployment rates were in DC (6.0%), California (5.5%), Nevada (5.4%), Michigan (5.2%), New Jersey, Ohio, and Oregon (all 5.0%). Alabama, Hawaii, Montana, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.9% was the lowest in the nation.

Puerto Rico’s unemployment rate edged up to 5.6% and the island’s job count rose 3,100.

State Labor Markets in August 2025

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Sharmila Whelan

At the start of the year, the consensus view was grim: the US-led world economy was heading into recession, inflation would spiral out of control, and global trade faced collapse. Yet, none of this has come to pass. Business-cycle indicators still show resilience, and neither a global trade downturn nor sustained inflationary pressure has materialised.

**Global Exports: Resilient Despite Tariffs**

The trade war has been disruptive but not disastrous. In the US, GDP contracted in the first quarter, largely because of a sharp rise in imports as manufacturers front-loaded inventories ahead of tariff deadlines. By the second quarter, domestic demand shrank 0.4% quarter-on-quarter as inventories slumped. Exports and residential investment declined, but consumer spending actually strengthened—hardly evidence of households buckling under tariff pressure.

The labour market has softened but isn’t collapsing. Unemployment at 4.3% is still below the pre-pandemic average of 5.1%, while August retail sales rose a brisk 5% year-on-year.

Surprisingly, the trade war’s impact on global trade has been modest. World exports dipped 6.5% from late 2024 to February 2025, only to rebound 13%, leaving shipments up nearly 6% year-to-date through May (Figure 1). The sharpest weakness came in April and May, immediately after tariff hikes, but the recovery was swift.

By comparison, past crises inflicted far greater damage. During the Global Financial Crisis, global exports collapsed by 47% in just eight months. Between 2014 and 2016, shipments fell 28% amid crashing commodity prices, a slowing China, and a strong US dollar. The pandemic caused a 33% peak-to-trough fall when economies shut down worldwide. Against this backdrop, the current downturn appears relatively mild.

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Source: Haver Analytics & Westbourne Research

**Regional Shifts**

The trade war has altered global trade shares. Asia’s share of exports declined from 53% In January to 49% by May, even as Asian manufacturers continued to dominate (Figure 2). Their performance remains a bellwether for global trade.

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And it is noteworthy that Asian exports, with and without China, have held up through escalating tensions (Figure 3). Chinese exports to the US fell at double-digit rates between April and July, reflecting both weaker demand and shipment front-loading. Yet, overall Asian export growth slowed only to 8% year-on-year in May, stronger than January’s 4.7%. By July, shipments accelerated again, up 11.3% year-on-year.

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**US Trade Account**

The current account and government coffers have benefited the most from higher import duties. Figure 4 shows the immediate outcome was a strong rise in imports to beat the tariff rise followed by a slump, which leaves the trend mostly unchanged. US exporters are yet to see any positive upside. It is too early. Greater market access from new trade deals will take time to translate into higher US exports. Again, the benefits to American manufacturers are likely to be limited by their relative lack of cost competitiveness compared to emerging market exporters. The biggest beneficiaries will be traditional fossil fuel and defence companies—both sectors on which we have an overweight.

A quick word on dollar weakness and US exports: two points are worth noting. First, currency depreciation typically boosts export competitiveness with a lag of 12 to 18 months. Second, global exporters—particularly those in emerging markets with inherent cost advantages—stand to benefit just as much as, if not more than, their American counterparts, given the US dollar’s central role in international trade settlement.

Figure 4 shows the US the trade balance declining from minus US$155bn in January to minus US$103bn by July. The improvement should be sustained, although a further significant narrowing is unlikely as the economy expands and global exporters adapt to new tariff rates.


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**Exporter Pricing Power**

The improvement of the trade balance is down to the import bill shrinking. US imports volumes after growing on average by 25% year-on-year in 1Q25, rose on average by 0.6% year-on-year in 2Q25 and by 1.7% year-on-year in July while import prices which were rising by 2.2% year-on-year at the start of the year were flat in August after falling year-on-year in the previous three months.

Certainly, Asian exporters have been discounting prices to offset the decline in demand caused by rising tariff rates. This is confirmed by both anecdotal evidence from China and export price data for Japan, Korea and Taiwan (Figure 5). Is this going to last and does it have implications for Asian corporate earnings growth going forward? For China probably yes, because of the weakness of the domestic economy and overcapacity. Elsewhere we expect exporter pricing power to return going into 2026 as global growth and trade pick up and once tariff hikes are digested.

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**Inflation Impact**

Contrary to early fears, tariffs have not unleashed runaway inflation. For tariffs to cause sustained inflation, two conditions must hold: staggered hikes over time, or excessively loose monetary policy. Neither condition applies today. Instead, tariffs deliver a one-off step-up in price levels without igniting an ongoing inflationary spiral.

Because Trump’s tariffs target goods rather than services or commodities, their impact is concentrated in core consumer prices (excluding food and energy). These remain contained: in August, US core inflation was 3.1% year-on-year, down from 3.3% at the start of the year. In Europe, the comparable figure was 2.3%, also lower than earlier in the year. Figure 6.

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Judging by US import and producer prices - overall and for consumer and intermediate goods - there are signs of pipeline price pressures stemming from higher trade tariffs (Figure 7).  This suggest that core consumer prices in the US are likely to rise further.

That said, the transitory impact of high tariff rates on core consumer prices is likely to be more muted than consensus had anticipated. If, as forecast, consumer prices continue to edge up through 2026 it will be cyclically driven, not by tariffs.

250916SW7.jpg

**Conclusion**

Despite sharply higher US import tariffs, the global economy has proven far more resilient than expected. Global exports continue to rise, corporate profitability is holding up even amid price discounting, and inflation remains moderate.

The evidence suggests the impact of tariffs—on trade volumes, corporate earnings, and consumer prices—has been muted and transitory. Trade flows are adjusting, exporters are regaining competitiveness, and households are not retrenching. In short, the tariff war has been more noise than shock: disruptive, yes, but far from the abyss once predicted.

Global Trade and Tariffs: Resilience Amid Uncertainty

Paul L. Kasriel

Chart 1 shows that no matter how you slice it and dice it, consumer price inflation is trending higher. In the three months ended August 2025, the annualized rate of consumer inflation has ranged from 3.3% (FRB Cleveland 16% Trimmed Mean) to 3.65% (CPI excluding food and energy components). Again, consumer inflation is trending higher.

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And yet, on Wednesday, September 17, the Federal Open Market Committee, with or without Governor Cook, will vote to cut the federal funds rate, which now stands at 4.33%, by at least 25 basis points. Why? Ostensibly, because the labor market is weakening. The recent subject-to-large-revisions nonfarm payrolls data certainly suggest that the labor market is weakening. As shown in Chart 2, in the three months ended August 2025, the change in total nonfarm payrolls increased by only 88 thousand (the red bars). There is some question as to how much nonfarm payrolls are being affected by the crackdown on undocumented workers and on southern border crossings. Moreover, the imposition of tariffs by the US government may have reduced employment in some sectors. The recent subject-to-small-revisions continuing unemployment claims data also suggest that there has been a weakening in the labor market, but that weakening has diminished in the past three months. In the three months ended August 2025, the change in continuing unemployment claims was 36 thousand compared with 86 thousand in the three months ended June 2025 (the blue line). So, yes, the labor market does appear to be weakening, but weakening enough to warrant a cut in the federal funds rate?

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All else the same, a cut in the federal funds rate would result in an increase in the sum of the monetary base and bank credit. As Chart 3 shows, the eight-month annualized growth in this sum as of August 2025 was 5.62%, the fastest growth eight-month annualized growth since March 2022. Let me remind you that growth in this monetary quantity leads growth in goods/services price inflation by about two years. I realize that two years into the future seems like infinity in terms of financial market psychology, but with consumer inflation already trending higher and ambiguity as to the causes of the recent weakening in the labor market, is now the time for the Fed to cut the federal funds rate?

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Inflation Is Trending Higher and the Fed Is Going to Cut the FF Rate on September 17

Mickey D. Levy

The Case Shiller Home Price Index fell 0.3% in June, its 4th consecutive monthly decline, lowering its yr/yr increase to 1.9% from 6.6% in February 2024 (Charts 1 and 2).

The flattening of home prices reflects slower demand for home sales and a moderation of transactions.  This has resulted from the surge in home prices--the Case Shiller Home Price Index surged 38.9% from mid-2020-mid-2022 and until recently it has continued to rise--combined with higher mortgage rates. The home affordability index hovers near an all-time high. The current fundamentals in housing suggest that the Case Shiller Home Price Index will continue to be flat-to-down in the next year.

**_The recent consecutive monthly declines in home prices have potentially important implications for overall inflation._** Rental costs and OER (Owners’ equivalent rent of residences) are the largest combined components of the CPI and PCE Price Index.  OER and rental costs comprise 33.6% of the CPI (OER, 26.2%; rental costs, 7.4%) and somewhat less in the PCE price index. PCE inflation (the PCE inflation reflects the prices of all goods and services consumed, while the CPI excludes consumption that is financed by third party payers, including Medicare, Medicaid and employer-financed health insurance), which results in a higher weight for health care costs and a lower weight for the shelter components.

Through July, rental costs were up 3.5% yr/yr, down from 5.1% a year earlier and OER is up 4.0% yr/yr, down from 5.3% yr/yr. (Chart 3).  Both OER and rental costs are derived by the Bureau of Labor Statistics from the trend in home values.  A historical note:  prior to May 1983, the CPI included direct measures of mortgage rates.  This measurement presumed that homeowners bought their homes at current mortgage rates each month. Beginning win May 1983, the BLS shifted its measure of inflation and replaced the mortgage rate with measures of OER and rental costs.  Since then, there have been modest modifications.

**_Model-based predictions of rental costs and OER._**  By summer 2021, the Fed had lowered rates to zero and engaged in massive purchases of Treasuries and MBS, and the government had increased deficit spending by a whopping 25% of GDP.  Inflation had just begun to accelerate, and Case Shiller Home Price index was soaring. Along with my former colleague Mahmoud AbuGhzalah, I estimated a model that predicted changes of OER and rental costs based on the Case Shiller Hole Price Index.  The model proved prescient, as described below.  Based on that model, I now predict the OER + rental costs will continue to moderate sharply in the next year to yr/yr increases close to one-half their current pace. And if the Case Shiller Home Price Index continues to be flat-to-down a touch—which seems likely based on their current lofty prices and soft housing demand, the monthly changes in rental costs and OER will **_subtract_** from inflation, and their yr/yr increases will head toward zero in 2027.  
Our model was a VAR (vector auto regression) with three variables, the Case Shiller Home Price Index, rental costs and OER in which all variables are regressed on their lagged values. This allows the model to estimate the impacts of a shock to one of the variables.  Most importantly, it estimates the lagged impacts of a change in the Case Shiller Home Price Index on OER and rental costs.  We estimated the model using monthly data going back to 1983 when the BLS changed its method of calculating the CPI to include OER and rental costs.

The model provided a robust statistic fit, with percentage changes in OER and rental costs optimally following the Case Shiller Home Price Index by 12 months and more.  In Summer 2021, the model predicted that OER and rental costs, which at the time were rising 3.25%-3.5% yr/yr, would soar and contribute to very high inflation.  That’s exactly what happened. This increase in housing inflation somehow came as a surprise to the Fed.  When inflation and the shelter component soared in the second half of 2021 and 2022, the Fed began measuring inflation excluding this important sector.  When OER and rental cost increases reached 7.5% while the increases in Case Shiller had begun to ebb, we re-estimated the model and it predicted OER and rental costs would recede. They did.

The four recent consecutive monthly declines in Case Shiller (April-July 2025, when its monthly change averaged -0.3%) and its rapidly declining yr/yr increases now predict a continued deceleration in OER and rental costs.  Based on the moderating increases  of the Case Shiller Home Price Index to date, the monthly and yr/yr increases in OER and rental costs should continue to decelerate significantly further, and subtract from inflation. **_I expect the Case Shiller index to remain negative to flat for many months to come, and for its yr/yr to eventually decline toward zero.  This will contribute to lower inflation, more so in the CPI than the PCE, and will likely be reflected in lower inflationary expectations._**  As that unfolds, the Fed can be expected to drop its measure of inflation that excludes the housing component.

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Home Prices, OER and Rental Costs:  Positive News for Inflation in 2026-2027

Joel Prakken

...was the reaction in financial markets after the latest employment report showed that, including revisions, growth of establishment employment slowed to a crawl over the last three months. Investors, who before that report were convinced the Fed will maintain its policy rate in the range of 4¼% - 4½% at the September meeting of the FOMC, are now equally convinced the Committee will cut the rate by ¼ percentage point, a shift in sentiment re-enforced by dovish remarks delivered by Chair Powell at the Fed’s annual shindig in Jackson Hole.

While not religious about it, I do find the Taylor rule a useful framework for contemplating the short-run dilemma facing the Fed as it attempts to satisfy the dual mandate of low inflation and high employment. For a given “neutral” real (i.e., inflation-adjusted) federal funds rate – today we call it real “r-star” – the original rule showed the Fed: (1) raising (lowering) the nominal policy rate by 50 basis points for each percentage point that real GDP exceeds (falls short of) potential GDP; (2) raising (lowering) the policy rate by 150 basis points for each percentage point that inflation exceeds (falls short of) 2%. The value of real r-star itself is not observed directly, only inferred from empirical models. However, the Fed’s Summary of Economic Projections (SEP) reveals policymakers’ views on the matter. For example, the June SEP shows, in the long-run, inflation of 2% and a nominal funds rate of 3%, implying a value of real r-star of 1% - unchanged from December’s SEP.

Another familiar rule in macro is Okun’s law relating changes in the unemployment gap to changes in the output gap. Using a typical textbook version of Okun’s law, the Taylor rule can be restated to show the Fed lowering (raising) the funds rate by 100 basis points for every percentage point that the unemployment rate exceeds (falls short of) the full-employment rate. The current unemployment rate is 4.2%, slightly below CBO’s estimate (= 4.3%) of the “non-cyclical” unemployment rate, while the 12-month change in the core PCE price index is 2.8%. If real r-star is 1%, then current values of the unemployment rate and inflation imply an appropriate policy rate of 4.3%, exactly equal to the funds rate in July.

From this perspective the Fed should be in no hurry to ease policy and, by cutting rates, risks perpetuating inflation above the 2% objective. The argument _for_ a rate cut is that continued slow growth of employment will soon lead to rising unemployment that, through the Phillips Curve, will reduce inflation risks associated with a one-off increase in tariffs, allowing the Fed preemptively to shift its focus to the employment half of the dual mandate.

This is a demand-side narrative that may prove out, but there is a supply-side story to tell here as well. With each employment report the BLS publishes monthly data on the labor force that tautologically is the product of population and the labor force participation rate. In Chart 1, the orange line depicts the recent 12-month percent change of this series. Unfortunately, it is contaminated by “population controls” introduced by the BLS each January. Fortunately, the BLS publishes alternative monthly estimates of employment by age and gender that smooth through the population controls. By multiplying the reported participation rate into this alternative series for population, I calculated a smoother version of the labor force (blue line). Over the last year, but especially in 2025, its growth has slowed from 1½% to zero as the participation rate has fallen, especially among foreign-born workers – the consequence of fear engendered by the Trump Administration’s policies on immigration. And this surely understates the actual deceleration in the labor force because estimates of recent population growth do not yet reflect the sharp reduction in immigration – especially border crossings - over the last year.

Why does this matter? Firstly, addressing the current clamor for a rate cut: growth of employment that is lethargic because it is constrained by slow secular growth of the labor force does not necessarily imply a cyclical rise in unemployment requiring rate cuts under the Taylor rule. Indeed, along a steady-state path with no growth in the labor force, I would expect monthly changes of employment to be zero with a constant unemployment rate. Secondly, however, it is standard macro that, all else equal, slower growth of the labor force is associated with a lower equilibrium real interest rate – i.e., a lower real r-star. The logic is that a deceleration in the labor force results in a relative excess of capital the puts downward pressure on the rate of return.

To get an empirical feel for this I fired up my macro system - which, on its supply side, is a Solow growth model – and calibrated it to the current economy assuming the real r-star of 1% shown in the recent SEPs. Then I reduced the annual growth rate of the labor force to zero from a baseline value of 0.7% (the most recent 10-year average) and held it there through 2028 before allowing a gradual recovery. With the Taylor rule maintaining the economy close to full employment, the system kicks out the inferred change in the real r-star. The results of this experiment are shown in Chart 2. They show the deceleration in the labor force is associated with a decline in real r-star that averages about ¼ percentage point through 2028. This could justify the Fed cutting the nominal policy rate even with the economy near full employment and inflation running above target.

None of this is precise. There are unobservable considerations and _ceteris_ that may not be _paribus_. While in the minority, there are Fed watchers worried that by cutting rates now, the FOMC may validate inflation above 2%. It is a legitimate concern but, thinking about it from a supply-side perspective on the economy, I find that risk a little less concerning.

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**A PDF version** of this commentary is available [here](https://static.haver.com/Haver_Commentary_Holy_Rate_Cut_082725_c394d9425e.pdf).

State Labor Markets in August 2025

Charles Steindel

More Viewpoints

Global Trade and Tariffs: Resilience Amid Uncertainty

Inflation Is Trending Higher and the Fed Is Going to Cut the FF Rate on September 17

Home Prices, OER and Rental Costs: Positive News for Inflation in 2026-2027

Holy Rate Cut Batman...