Economy in Brief

President Trump’s tariff policies have been a major driver of financial market volatility in recent days, sparking sharp swings in equities and currencies. While the administration has temporarily reversed its proposal for a 25% tariff on imported goods from Canada and Mexico, uncertainty surrounding US trade relationships, the risk of retaliatory measures from key trading partners, and broader concerns about global growth continue to unsettle investors. A fundamental irony is that the US trade deficit—the very issue that President Trump purportedly aims to correct—is not primarily driven by so-called “unfair” trade practices but rather by global savings and investment imbalances (chart 1). Nations such as China, Germany, and Japan have maintained high savings rates for several years, and their excess capital is continually recycled into US financial markets, where superior returns and deep liquidity have made the US an attractive investment destination. The persistent inflow of foreign capital strengthens the US dollar, reinforcing the trade deficit rather than narrowing it (charts 3 and 4). Indeed, the multi-year highs in the trade-weighted value of the dollar serve as clear evidence that capital has continued to flow into the US, sustaining deficits despite protectionist measures. Ultimately, Trump’s tariff-driven policies risk doing more harm than good, as they threaten to slow global growth, strain relationships with allies, and exacerbate inflationary pressures by raising input costs for US businesses and consumers. Rather than addressing the root causes of global imbalances (chart 5), such measures distort supply chains (chart 6), impair productivity growth, and fail to alter the fundamental drivers of trade deficits.

• Home prices are little changed & mortgage rates fall.
• Median income improves.
• Affordability improves throughout country.

• Annual increase remains below 2023 gain.
• Compensation growth accelerates.
• Quarterly Increase in unit labor costs is strongest since Q1’23.

• Total beneficiaries had increased the week before.
• Insured unemployment rate holds at long-standing 1.2%.

• Total index remains below October high.
• Business Activity index falls to five-month low; new orders weaken but employment firms.
• Prices Index moves lower, reversing sharp December gain.

• Deficit widened $19.5 billion to $98.4 billion.
• Good deficit widened $18.9 billion while services surplus narrowed $0.6 billion.
• Exports fell 2.6% m/m while imports rose 3.5% m/m in December.

• Employment increase is led by service sector hiring.
• Wage gains for “job changers” & “job stayers” are steady.
• Small, medium & large business hiring is firm.

• Purchase loan applications fell while refinancing loan applications jumped in the latest week.
• Effective interest rates on 30-year fixed-rate loans edged down.
• Average loan size rose to the highest since the November 1 week.