Viewpoints: 2025

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.

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.

Kevin, in your role as Director of the National Economic Council, you carry the significant responsibility of advising the president on economic and fiscal policy matters, while also acting as an "honest broker." I was genuinely shocked and disappointed to hear that you argued the dismissal of the BLS Commissioner was an effort to "restore" trust in the BLS. This is entirely false. In reality, the removal of the BLS Commissioner sends the opposite message, indicating that the administration will attempt to manipulate the numbers for political gain.

As you mentioned, the jobs data has indeed been "awful" for a while. But why is this happening? The statistical agencies, especially the BLS, have been lacking sufficient funding from Congress to produce the highest quality data for policymakers, businesses, individuals, and investors. Instead of seeking additional funding, the current administration has dismissed its leader, claiming this will lead to better statistics, which many now distrust.

In the most recent employment figures, companies of all sizes have communicated to you and others in the administration that the erratic tariff policy has generated such confusion and uncertainty that managing a business on a day-to-day or weekly basis has become nearly impossible.

Janet Norwood, the esteemed BLS Commissioner, remarked that "the professionals who compile the nation's statistics must be courageous enough to insist that their work remains free of political interference." The dismissal of the BLS Commissioner suggests that this is no longer feasible.

Several presidents have challenged governmental statistical agencies over the years, but these disputes typically involved the reporting and interpretation of economic data. Today, President Trump has crossed a "sacred red line" by firing the Bureau of Labor Statistics Commissioner, claiming the individual was "manipulating the jobs data." Employees of government statistical agencies operate with the highest integrity.

The fact that Treasury Secretary Bessent and National Economic Council Chair Hassett did not prevent this firing is an embarrassment to everyone working in any government statistical agency. Bessent and Hassett should resign immediately, as they can never be trusted, and their failure to stop the firing of the BLS commissioner should disqualify them from any other position in the federal government, especially at the Federal Reserve.

Those employed in the economic, business, and financial sectors must ensure that professionals responsible for collecting our national statistics remain independent of political influence. The best way to begin is by dismissing those currently in charge who failed to prevent the firing of the BLS Commissioner.

The Trump administration often highlights the revenue from tariffs, but hides the decrease in corporate income tax due to increased tariff-related expenses. By June 2025, covering three quarters of the fiscal year, corporate tax revenues have dropped by over $30 billion compared to the previous year.

Therefore, while the government might be earning extra revenue from tariffs, it is US companies that are covering the costs, resulting in them paying less in taxes.

Federal Reserve monetary policy has enormous effects on the behavior of the business cycle. These business-cycle effects, in turn, affect the political environment. For example, the surge in consumer price inflation in 2021-22 appeared to be an important factor in the 2024 presidential election. In previous commentaries, I have argued that Fed monetary policy in 2020-21 exacerbated the inflationary environment in 2021-23. In my July 8, 2025 commentary “Fed Operating Behavior – Don’t Let the Perfect Be the Enemy of the Good”, I argued that the Fed should act so as to have the sum of the monetary base plus loans and securities on the books of depository institutions (thin-air credit) grow at a constant annual rate of 5 percent. Would the business cycle be eliminated under these circumstances? No. Would the amplitude of business cycles be damped? Yes. Could the Fed legitimately be criticized for political bias if it maintained thin-air credit growth at 5% per annum, regardless of what political party held the presidency? No. Would the Fed lose its mystique? Yes.

Let’s take a trip down memory lane to see how Fed monetary policy has exacerbated the business cycle. The Fed opened its doors for business in 1914, the same year that World War I started. Although the US did not enter WWI until April 1917, we were supplying war materiel and foodstuffs to the Allies prior to our entry. Plotted in Chart 1 are the year-over-year percent changes in the annual average M2 money supply (annual data for thin-air credit did not become available until 1946) and the annual average CPI. Growth in the M2 money supply accelerated to 8.5% in 1915 from 3.4% in 1914. In the six years ended 1920, M2 grew at a compound annual rate of 11.9%. And you know what else grew rapidly in these six years? The CPI. In the six years ended 1920, the CPI grew at a compound annual rate of 12.2%. So, right out of the box, the Fed was aiding and abetting consumer price inflation.

How significant is a 15% tariff on imported consumer goods? It's substantial enough to cause an increase in consumer inflation, yet not substantial enough to encourage a shift in production to the US. While investors might express "good cheer" over tariffs averaging 15% instead of a much higher rate, the end result will be higher inflation rather than an expanded U.S. manufacturing sector, which was the primary aim of Trump's tariff policy.

The Trump administration recently reached several trade agreements with major trading partners, implementing a 15% tariff on a broad array of imported goods, many of which are consumer items.

Is that significant? According to consumer price index data, prices for consumer goods, excluding food and energy, were unchanged from 2000 to 2020. However, they rose by nearly 15% in 2021 and 2022 due to product shortages and supply disruptions stemming from the pandemic. Consequently, a potential 15% price hike on non-energy and food consumer goods is notably large, as it matches the total price increase over the past 25 years. There is no doubt that consumer prices for these goods will increase over time as these tariffs are factored into the pricing structure.

However, is the 15% tariff hike on consumer goods significant enough to compel companies to relocate production to the US? While it might attract some new investment, the cost difference between manufacturing in the US and other countries vastly exceeds 15%. Additionally, the expenses associated with new investments, as well as the time required to secure locations, acquire permits, and finish construction, are considerable. By the time these processes are completed, many of these tariffs might be eliminated under a new administration.

Assessing the results of Trump's tariff policy will take months and years, but it is very probable will lead to increased consumer inflation and minimal changes in global manufacturing.

The Federal Reserve Bank of Philadelphia’s state coincident indexes in June were again generally lackluster. In the one-month changes, no state had an increase as large as .5 percent (Illinois was up .49 percent). Six states saw declines. These were spread across the nation, with Massachusetts down .52 percent. Over the three months ending in June nine states were down, with Massachusetts on the bottom (down .84 percent) here as well. Indiana’s 1.48 percent was the largest gain, while only three other states had increases above 1 percent. Over the last twelve months, Massachusetts and Iowa were down, and five others saw increases of less than one percent. South Carolina was the only state with an increase higher than four percent (Idaho was up 3.62 percent), and six others were at or higher than three percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .74 and 2.56 percent. Both measures appear to be roughly in line with what the state numbers would have suggested.