Charles Steindel

State labor markets again showed little change in July. Four states did report statistically significant increase in payrolls. However, the increases in New York and Missouri—both .6 percent--were heavily influenced by unusually sharp gains in government, probably reflecting some seasonal anomalies. Maryland’s .4 percent increase also owed a lot to government, though South Carolina’s comparable increase owed little to the public sector. The sum of job changes across the states was somewhat larger than the reported national increase of 73,000.

The unemployment rate fell a significant .2 percentage points in Alabama and Colorado, while increasing .1 percentage point in California. The highest unemployment rates were in DC (6.0%), California (5.5%), Nevada (5.4%), and Michigan (5.3%). Hawaii, Montana, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.9% was yet again the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.5% and the island’s job count rose 2,600.

State Labor Markets in July 2025

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Andrew Cates

Energy is not just another input into an economy — it is the foundation on which productivity, competitiveness, and long-term growth rest. The capacity to generate abundant, reliable, and affordable electricity underpins industrial strength, attracts investment, and enables technological transformation. Where these conditions are met, economies flourish; where they are absent, the result is stagnation.

That is why the UK’s dismal record on per-capita GDP growth over the past five years — one of the weakest among advanced economies — cannot be understood without reference to its electricity system. High prices, declining per-capita generation, and an energy mix that has failed to replace retiring firm capacity with equally reliable low-carbon alternatives have eroded competitiveness. By contrast, the United States has combined low electricity prices with high and stable per-capita generation, giving it a structural advantage in attracting energy-intensive industries and supporting the AI- and manufacturing-led investment boom.

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**The evidence in the numbers**
Recent data show the UK languishing near the bottom of the G7 for per-capita GDP growth, while the US leads comfortably. Electricity prices tell part of the story: in the UK, wholesale prices have averaged among the highest in the developed world over the past two years, while US prices are less than half as high. The gap in per-capita generation capacity is equally stark — US output per person is nearly three times higher than the UK’s.

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These differences reflect deep-seated structural weaknesses in the UK system. Domestic generation per capita has been in steady decline since the early 2000s. Ageing nuclear plants have been retired without timely replacements; the coal exit has removed dispatchable baseload; and although renewables have expanded rapidly, they lack sufficient firm low-carbon backup or storage to guarantee supply. Grid constraints, planning delays, and policy inconsistency have compounded the problem, pushing up costs for households and industry alike.

The consequences go beyond manufacturing. In AI, for example, the US leads in hyperscale data-centre capacity and high-performance computing installations — both voracious electricity users. This creates a powerful feedback loop: abundant, affordable energy supports technological leadership, which in turn attracts further investment and strengthens long-term competitiveness.

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**Contrasts abroad**
**United States:** The US benefits from a large, diverse generating fleet — nuclear, renewables, and abundant domestic gas — that keeps prices low and capacity high. This underpins the economics of data centres, semiconductor fabs, and electrifying industry. Long-dated incentives under the Inflation Reduction Act and state-level reforms have encouraged private capital to expand capacity further. The result is not just energy security but an enduring cost advantage that strengthens the country’s relative growth position.
**France:** A high share of nuclear generation delivers firm, low-carbon power at scale. Outages have been a temporary drag, but the system remains one of Europe’s most competitive, offering a template for combining decarbonisation with reliability.
**China:** Policy has prioritised overbuilding capacity — fossil and renewable — to ensure electricity is never a binding constraint on growth. Large-scale transmission build-out and rapid renewable deployment are reshaping the mix while sustaining industrial momentum.
**Germany:** A cautionary tale. The nuclear exit, over-reliance on imported gas, and rapid renewables expansion without adequate backup have produced high prices and reduced competitiveness.

**The UK’s competitiveness challenge**
The UK’s combination of high prices and declining capacity is more than an energy problem — it is an economic strategy problem. Energy-intensive industry faces a structural disadvantage. The digital economy, from AI to electrified transport, is constrained by a system that is neither as reliable nor as cost-effective as its global peers. Without a decisive shift in policy — prioritising firm low-carbon generation, accelerating grid investment, and reducing volatility in industrial energy costs — the UK risks further entrenching its underperformance.

**Conclusion**
The charts make the relationship between energy and growth hard to ignore: the US leads on both, the UK trails on both. Electricity is not a sector in isolation; it is the backbone of economic competitiveness. Countries that ensure abundant, affordable, and low-carbon power will lead the next phase of global growth. Those that fail to do so will be left explaining — as the UK is now — why their economies are stuck in the slow lane.

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Powering Prosperity: Why the UK Has Been Falling Behind

Shashwat Indeevar

Peter D'Antonio

The global race in the field of Artificial Intelligence is becoming a priority for both nations and firms alike. However, we are concerned that the overwhelming energy needs of AI will force countries to compromise on the competing goal of environmental sustainability. In the second of his three-part Viewpoint series, [The Age of Constraints](https://www.haver.com/articles/the-age-of-constraints-part-2-ai-and-the-energy-reality-check), Andy Cates did an energy reality check. There he highlighted real energy prices and the ever-changing energy demands that are needed to power and cool the data centers supporting AI functionality. We further explore how leading economies have pursued energy generation over the past 20 years and deduce which directions they might take to power up AI.

Specifically, we compare the forms of electricity generation across the three major players in the AI race – the United States, China, and Europe. This comparison shows the stark differences in total power needs as well as the contrasting compositions of power generation. These compositions reflect both physical capacities and societal goals across the three major economies.

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**United States**
The most striking change in total US electricity over the past two decades has been the shift in fuels for secondary electricity generation from coal to natural gas. Coal use has collapsed from 2,144 TWh in 2004 to 712 TWh in 2024, while natural gas use has surged from 764 TWh to 2,005 TWh. There also has been a notable increase in renewables, which have gone from just 87 TWh to 829 TWh. Other sources of electricity – hydroelectricity and nuclear – have not really changed much in the past 20 years. Total electricity generation has seen a slight increase from 4,233 TWh to 4,632 TWh.

Given the enormous energy demands of AI, Cates reports that this total is set to rise by about 500 TWh in the next five years. President Trump recently released “Winning the Race – America’s AI Action Plan” on the Whitehouse website. It has three pillars: Accelerate AI innovation, Build American AI Infrastructure, and Lead in International AI Diplomacy and Security. The second pillar explicitly states that American energy capacity has stagnated since the 1970s and stresses the dire need to develop a power grid that matches the pace of AI innovation.

So, what form of energy could the US increase rapidly to power AI? The US has capacity to increase its electricity production very quickly using natural gas and coal. Given the climate in Washington and the need for more energy, we may very well see a significant reversal in the downward trend in coal and a pickup in the usage of natural gas. We are unlikely to see a surge of renewables and nuclear power.

In terms of capacity, the US has tremendous natural gas and coal reserves. As of 2020, the US had 12.62 Trillion Cubic Meters of natural gas proven reserves, which is slightly more than China and Europe combined (see figure below).

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**China**
Over the past 20 years, China has ramped up its electricity production to more than the US and Europe combined. Total electricity generation has increased from 2,203 TWh in 2004 to 10,087 TWh in 2024, or 358%. Coal accounts for the lion’s share of electricity generation, and has been the main source of growth, skyrocketing from 1,722 TWh in 2004 to 5,828 TWh in 2024. China has been building up its ability to produce clean or renewable energy as well, but the increases have been nowhere near sufficient to meet the rise in its needs. In the past decade, hydroelectricity has steadily risen from 354 TWh to 1,354 TWh and renewable energy generation has jumped from 4 TWh to 2,045 TWh. Natural gas and nuclear energy have accounted for a growing but minor share of the total. 

As the Chinese economy continues to grow, the rise in energy needs shows no sign of abating. As such, China’s latest Five-Year Plan calls for the building of 150 new nuclear reactors over the next decade with the goal of generating about 150GW of additional nuclear energy by 2035. Based on the IRENA dataset in ENERGY, we estimate that this could add nearly 1,500TWh of electricity. However, a near-term jump in additional electricity needs due to AI would likely add to the Chinese electricity need and have to be satisfied by more coal generation.

**Europe**
Europe has been shifting away from fossil fuel electricity generation and toward renewables for the past two decades. Renewable energy is now the biggest electricity generation sector in Europe and is rising rapidly. It went from 130 TWh in 2004 to 1,214 TWh in 2024, offsetting declines in coal and nuclear energy. Coal has fallen from 1,127 TWh to 484 TWh, and nuclear energy has drifted down from 1,122 TWh to 766 TWh. Other sectors (hydroelectricity and natural gas) have drifted sideways. Total electricity generation is essentially unchanged.

Given the cultural and political will to reduce fossil-fuel emissions, Europe would probably redouble its efforts to expand its carbon-neutral energy generation to satisfy its additional AI power needs. However, the reality is investment in renewables takes time. In the near term, Europe would have no choice but to increase its electricity generation from fossil fuels or risk falling behind in the AI race.

**Conclusion**
Based on our analysis of current power generation and capacities, we believe that the United States, China, and Europe will face a dilemma: either meet their carbon reduction goals by producing less energy from fossil fuels or meet their AI goals by burning more fossil fuels. We believe the AI race could reverse much of the environmental gains made in the past two decades and could have deleterious consequences for global warming.

The Power of AI

Mickey D. Levy

The trade deficit narrowed slightly in June, as exports fell 0.5% from May and imports fell 3.7%, clearly reflecting the negative impact of President Trump's on-again, off-again tariff policies and related uncertainties.

It was the third consecutive month of declining imports following the bulge in Q1 when U.S. businesses ramped up imports in anticipation of tariffs.  Chart 1, which shows the bulge in imports earlier this year and its recent unwinding, is striking.  The chart also shows the flattening of imports in 2018-2019 following a healthy rise in prior years before Trump imposed tariffs in his first term.  June exports fell for the second consecutive month.

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The surge in imports in Q1 was driven heavily by a 72.8% annualized rise in imports of information processing equipment.  Amid fairly weak consumption, a hefty portion of the rise in imports resulted in a rise in business inventories. Consumption accelerated modestly in Q2, rising 1.4% annualized compared to 0.5% in Q1 (and well below a 2.6% average in 2023-2024), but that was enough to allow businesses to sell much of their accumulated inventories in Q2.  The National Income and Product Accounts recorded a swing from inventory accumulation of $120 billion in Q1 to liquidation of $20 billion in Q2.  

As shown in Table 1, the widening of the trade deficit associated with the spurt in imports subtracted 4.6 percentage points from RGDP, offset by a 1.4 ppt contribution by business fixed investment and the surge in inventories that added 2.6 ppt to RGDP.) The tariff-induced reversal in Q2 resulted in a narrowing trade deficit that added 5.0 ppt to RGDP while the inventory liquidation subtracted 3.2 ppt.

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Since businesses' prices to customers were based on inventoried goods that had largely preceded the tariffs, there was no material impact on the measures of inflation--the PPI (at both final goods and intermediate goods stages) were flat and the PCE price index and CPI inflation each rose a touch but it's hard to see the impact of tariffs.

So far, the actual tariffs that U.S. businesses have remitted to the Customs Bureau of the U.S. Treasury Department has actually lagged behind calculations of the "average effective tariff" that has been commonly measured, for reasons explained by Marina Azzimonti of the Federal Reserve Bank of Richmond in "[Why Predicted and Actual Tariff Rates Diverged in May 2025](https://www.richmondfed.org/publications/research/economic_brief/2025/eb_25-29)", but they should be rising a bit in coming months (Azzimonti's empirical research on the tariffs has been very informative.)  Nevertheless, total tariffs in July were $29 billion, with a projected run rate exceeding $300 billion.

Note that if the tariff's revenues in July were extrapolated into the future, the total magnitude of tariffs would be similar in magnitude as the OBBBA tax cuts.  Does that mean the tariffs will have impacts that offset the major tax cuts just enacted?  No. The distortions to business production and consumers, combined with the spike in uncertainty generated by President Trump’s on-again, off-again tariff policies and retaliations by foreign trading partners, will accentuate the negative economic impact of the tariffs. I don’t expect recession, but they are a definite negative for the economy, both in the near term and the longer run.

I continue to hold to my early assessment that Trump's tariffs will have a much larger negative impact on the real economy than on inflation (or a one-time boost to the general price level).  The slowdown in aggregate demand that has begun to unfold supports that view. As the Employment Report for July indicates, while businesses have not increased layoffs of workers, they have paused hiring. The slowdown in employment will be reflected in a slowdown of wage and salary incomes.  Combined with heightened uncertainties, this will likely dampen consumer spending.   At the same time businesses are taking steps to avoid raising prices to the extent that they harm customers, while inflation-weary customers substitute for cheaper goods.

These interactions create distortions and harm the overall economy, but mitigate the impact on the general price level.  Note that consumers’ instincts to substitute cheaper goods or higher priced, tariffed imports also points toward lower measured inflation of the PCE Price Index, which is chain-weighted, than the CPI.

If Trump follows the pattern he established in his first term, the tariff skirmishes will not let up.  That means uncertainty will persist—note the Baker-Bloom-Davis Economic Policy Uncertainty Index remains very elevated--which will affect business and household decisions.

The combination of the hit to the real economy, particularly weaker labor markets, and elevated inflation, puts the Fed in a difficult situation in terms of achieving its dual mandate.  Historically, the Fed has responded much more quickly to labor market weakness than to higher inflation. Not surprisingly, the futures markets have priced in lower interest rates.  Interesting, that’s what happened in Trump’s first term:  the tariffs first imposed in mid-2018 that continued with the trade war with China materially slowed growth.  This led the Fed to begin lowering rates aggressively beginning in mid-2019.  We seem to be following a similar path.  President Trump does not seem to have learned from history, even from his first term.

Tariffs, U.S. Trade and Economic Performance

Sharmila Whelan

After a turbulent first half of the year, summer has brought calmer conditions for the Trump administration, the global economy, and financial markets. Major US trading partners have signed or are negotiating new trade agreements. While we previously noted that finalising these deals would take time, the easing of trade tensions alone has been enough to draw businesses, consumers, and investors back into action.

The view that the second half of 2025 will outperform the first remains intact, supported by solid business cycle fundamentals.

**Business cycle indicator assessment**

Figure 1 summarises the latest business cycle assessments. Green signals positive conditions, blue neutral, and maroon negative, with arrows showing momentum.

Since the last review:
•	**Unchanged:** US, China, India, Korea, Indonesia
•	**Improved**: Europe, Malaysia, Philippines
•	**Weakened:** Japan, Taiwan, Thailand

Europe’s uptick stems from an investment cycle rebound ahead of the tariff war. In Malaysia and the Philippines, broad money growth has turned positive, signalling stronger activity ahead without inflation risks.

Japan’s deterioration reflects an unusually low two-year real lending rate (-2.8%), which points to inflation risks but is tempered by slowing broad money growth and a weakening credit cycle. Inflation is moderating—3.2% YoY in June vs. 4% in January—despite public dissatisfaction over living costs.

Taiwan shows weakening broad money growth and credit, suggesting slowing domestic momentum. Thailand fares worst: the investment cycle is in downswing, leaving three of its five business cycle indicators negative.

**Conclusion:** Shifts in scores are not large enough to warrant changes to 2025 investment recommendations.

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**The corporate profit cycle**

As regular readers—and followers of Austrian economics—will know, the profit cycle is a critical leading indicator. It marks the turning points of both the business cycle and stock markets, and in fact, precedes them. When the profit cycle turns down, it signals that the economy is heading for a slowdown at best, a recession more likely, and in the worst-case scenario, a full-blown bust. For equity investors, the peak of the profit cycle is the earliest and most reliable signal to sell and take profits. 

Figure 2 tracks average return on equity (ROE) for listed sectors—a proxy for corporate profit trends.
•	**Strengthening or Stable:** Most countries, including the US, Japan, Taiwan, Indonesia
•	**Weakened:** China, Thailand

In the US, rising profitability supports the stock market rebound and quells fears of a tariff-driven recession. Indonesia surprised with a sharp ROE jump—from 7.9% in 1H24 to 12.6% in 1H25. Europe’s ROE eased (12.2% from 13.7%) but remains healthy. India’s profits held steady.

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China remains a key outlier: high debt, excess capacity, and intense competition—especially in solar, wind, and EV sectors—continue to pressure margins. Price wars have prompted Beijing to push for consolidation and curb aggressive discounting.

**The investment cycle**

The profit cycle leads the investment cycle, which in turn drives the credit cycle. Rising profits encourage firms to expand capacity, creating jobs and supporting wage growth. Entrepreneurs launching new products behave differently: they invest to meet unmet demand, often using seed capital or loans. If demand materialises, costs fall, markets expand, and investment accelerates.

Currently, investment cycles are in upswing in the US, Europe, Japan, Taiwan, and Malaysia. In the US, the ratio of real investment to GDP continues to move above trend, confirming the cycle’s strength (Figure 3).

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Source: Haver Analytics & Westbourne Research

**The credit cycle**

Credit cycles are in downswing in the US, Europe, India, Indonesia, Malaysia, and Thailand, and weak in Japan, Philippines, and Taiwan.

Even with aggressive ECB rate cuts, credit demand in Europe remains subdued. This is normal in early-stage investment upswings, as firms initially fund growth from internal resources. Credit demand typically picks up only once confidence in demand, earnings, and wage growth is entrenched.

In India and Indonesia, credit cycles will not turn until their investment cycles reverse—likely with a lag. Japan, Taiwan, and the Philippines face soft credit demand due to recent trade tensions, political uncertainty, and living-cost pressures.

The only economies where credit is growing faster than nominal GDP are China and Korea. In China, this is largely due to central bank and government stimulus, with private sector demand still weak. In Korea, household borrowing drives the expansion.

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**The cost of capital**

In six of the eleven countries—Europe, China, India, Korea, Philippines, Thailand—real lending rates are appropriate for their business cycle stages, giving central banks room to cut without stoking inflation.

Indonesia, Japan, Malaysia, and Taiwan have negative real rates outside normal ranges. Taiwan and Malaysia are extreme cases, making near-term rate cuts unlikely.

In the US, the real cost of capital has risen for 10 straight quarters, from -6.4% in 4Q22 to 2.7% in 1Q25. Monetary policy is tight, and while Trump’s criticism of Powell for not cutting rates faster has some basis, the Fed’s caution is understandable.

**Broad money growth**

Broad money growth is a leading indicator for inflation and monetary policy shifts. Central banks often respond late, so investors should watch money growth closely for early signals.

Figure 5 and 6 show money supply growth trends. The key takeaways are: first, if the US Fed is sitting tight, it’s with good reason. Broad money growth is picking up and so is headline inflation. This is also reason for the ECB to stay on hold. Second, despite negative real lending rates and talk of another fiscal stimulus package and a cut in the consumption tax the BoJ is likely to hesitate to tighten. Third expect central banks in Korea and Taiwan to err on the side of caution.

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Fourth, at best the Reserve Bank of India will deliver another 25bps in policy interest rate cuts this year. Finally, Figure 9, Chart 2, shows ASEAN broad money growth is easing, implying that there is room for their central banks to reduce lending rates. However, there is no urgency. Capital is priced neither too high nor low. 

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**In summary**

Across our eleven-country universe, aggregate business cycle scores have improved. Corporate profit cycles are strengthening in more economies than they are weakening. Investment cycles are in upswing in five major economies—most notably the US, Europe, and Japan, which together account for nearly half of global GDP.

Credit cycles are lagging, but this is expected and not a concern. The cost of capital is broadly appropriate, with rates too low in Japan and Taiwan. Broad money growth is accelerating in the US and Europe, consistent with a cyclical pickup in inflation, but far from the 2022–23 inflation shock.

The second half of 2025 should bring better economic conditions, supported by improving profits, expanding investment, and stabilizing global trade relations.

State Labor Markets in July 2025

Charles Steindel

More Viewpoints

Powering Prosperity: Why the UK Has Been Falling Behind

The Power of AI

Tariffs, U.S. Trade and Economic Performance

Global Outlook Brightens for 2025