Category: Uncategorized

Mark Schniepp
August 2025

Stronger Growth in Quarter 2 Offset the Quarter 1 Slowdown

We were told by a flurry of the analytical pundits observing the Trump administrations new polices that the proposed tariff regimen (combined with the downsizing of federal government) would crash the equities market, spike inflation, lower GDP and employment growth, resulting in recession, chaos and trauma.

That was last March and April. Fast forward five months to August 2025: the stock market moved to an all time high in July, GDP growth came in at 3 percent for quarter 2, labor markets are stable and creating jobs, and inflation has moved lower. Every indicator that was predicted to move in a negative fashion as a result of Trumpenomics 2.0 has moved exactly the other way.

Now the economy is not entirely out of the woods as there are still concerns and potential downsides on the horizon, but the probability of a meaningful negative outcome this year is less certain today.

The labor market report for July was weak, although preliminary. Unemployment still remains at 4.2 percent, a level that has generally held steady over the last 13 months. AI appears to be impacting job creation in many industries, as we reported last month in this newsletter series.

Tariffs have been delayed in implementation. Businesses have adopted strategies to mitigate tariff risk, like supply chain diversification or absorbing the tariff cost.  Consumers have substituted to other goods or not incurred the higher costs predicted for goods coming from China, Europe, Canada, or Mexico.

The stock market is overly worrisome with uncertainty, and overreacted last April. Earnings reports for Q1 and now for Q2 have been more positive then expected. The market pushed to an all time record high in July. It looks overbought now so don’t be surprised if a correction this month and into September dominates the movement of stock values.

The full impact of tariff policy is still unfolding. The pundits are still warning that the negative effects on prices, employment and GDP growth will become more pronounced in the future.

Course Correction on Tariffs

The initial tariff plan revealed on April 2 with the reciprocal tariff rates on all countries worldwide appears now to have been a gigantic PR scheme to coax our trading partners to rethink their tariff rates on U.S. exports and/or their non-tariff barriers which effectively preclude U.S. exports altogether.

A clearer picture of the global trade landscape is now emerging.

The United Kingdom was the first country to negotiate trade policy with the U.S., back in May. The tariff rate was set at 10 percent. The EU is the top trading partner with the U.S. and reached a 15 percent tariff agreement on July 29. The same rate was negotiated with Japan 7 days earlier. South Korea reached a deal on July 30. Though these recent trade deals have eased some uncertainty around tariff policy, they strongly suggest 15% is shaping up to be the floor for tariffs.

Tariffs at the current rate of 10 to 15 percent on all goods coming into the U.S. are generally manageable. Trump confirmed on July 28 that 15 percent represents the new standard for tariff negotiations. Furthermore, at the current rate of received tariff revenues to date, the federal government is on pace to collect $350 billion this year.

The policies to date would imply the average tariff rate is nearly 18 percent, far above the 2024 average of a just over two percent and the highest rate since the 1930s. As long as these significant tariffs are in place, the U.S. trade deficit should slowly but steadily start shrinking.

China faces an August 12 deadline to reach an agreement. Tariffs currently in place will likely add to higher export goods prices coming from China. However, we need to wait and see how the tariff structure and the corresponding response plays out.

Inflation is still an issue for the economy. The CPI for June still shows a 2.7 percent inflation rate over the last year. Fortunately, the 2025 calendar year trend for CPI inflation is decidedly down, but we still face tariffed goods coming into the U.S. and especially as the holiday season ramps up.  Consumers may substitute successfully enough to avoid tariff inflated priced goods but this circumstance remains a wait and see.

I’m not concerned about recession this year. I’m not really concerned about the new tariff economy either. They will likely have a minimal impact on prices and consumer spending.

Higher interest rates are a problem for the housing market and less so, the car market. Some relief may be coming over the next 5 months but it won’t be much. Stay tuned for tariff and labor market updates. Inflation and whether unemployment rises will be the important assessment indicators for the rest of the year.

Mark Schniepp
July 2025

The key issue emerging for the California economy in 2025 is the broad based weakness of the labor market. Only 3 sectors are responsible for all of the job creation this year, and two of the three are either entirely or largely financed by public sector funding—healthcare and local government. Up to now, these two sectors have been mostly unaffected by the recent advent of Artificial Intelligence.

As AI tools and technologies continue to advance, companies are increasingly exploring ways to leverage AI to enhance productivity, automate certain tasks, and reduce cost. This includes roles in sales and customer interaction, which may be affected by the increasing efficiency of AI systems.

Displacement of jobs by AI is no longer a warning; it has become a reality.

Microsoft announced on June 19, 2025 that thousands of layoffs will occur in July with the sales team taking the largest hit. On July 2, the company confirmed that 9,000 workers would be laid off. Last month, Microsoft cut 3 percent of its global workforce, or 6,000 workers. Amid these cuts, the company is investing $80 billion in AI infrastructure and data centers.

IBM announced 8,000 layoffs in late May, mostly in HR, with 9,000 more layoffs planned.

Intel also announced in June that it would lay off 10,000 workers or about 20 percent of its foundry workforce. Those layoffs are occurring this month to streamline operations and eliminate human bureaucracy with more automated systems. Other tech companies like Amazon, Meta and Google have also been implementing workforce reductions and restructuring as they prioritize AI investments.

Simply put, AI is automating tasks that are repetitive and time consuming for people. This includes data entry, answering phones, warehouse stock picking and sorting, and assembly line manufacturing, to name a few.

By industry, here’s how AI will help business with analytical precision and cost reduction:

Chatbots will handle routine customer inquiries. AI can also categorize and route customer support tickets to appropriate teams or agents. This eliminates administrative support jobs, one of the subsectors of professional business services.

AI can analyze customer behavior patterns in spending data, anticipate where products should be marketed and sold, and make recommendations for business strategies.  AI can quickly process large datasets, identifying trend and/or anomalies. The action eliminates intro and mid-level data analysts in the Information labor market of data analytics and processing.

AI can evaluate customer interactions with either AI customer service agents or human agents to gauge their emotional state to identify business areas for improvement. Humans doing this now are in the professional business services sector.

AI can power robots and automated systems that handle tasks like packing and sorting goods in warehouse and distribution center settings. Robots will replace warehouse jobs that are part of the transportation and warehouse labor market.

AI currently analyzes data from sensors and equipment logs to predict machine failure rates and develop schedules for maintenance, minimizing downtime and increasing equipment lifespans. Fewer workers are needed in manufacturing to handle these activities to keep assembly lines operating continuously. Jobs in manufacturing are now being eliminated and will continue to be eliminated.

AI can process financial data to automate routine reporting tasks for reports that banks and securities firms need to file with regulating agencies. This will eliminate jobs in the financial activities sector of the broader labor market

AI can handle facial recognition and object detection for security systems. Business services employment for these tasks can be entirely eliminated.

Chatbots are able to answer customer inquiries and resolve some issues, operating 24/7 without breaks or overtime pay. In fact, no pay.

Layoffs that have been the most prolific since the release of ChatGPT have occurred in software programming. AI-powered tools like GitHub Copilot and others can suggest and generate code snippets, functions, or even entire programs. This significantly reduces manual coding efforts and speeds up development. AI-driven tools can analyze code, identify potential bugs and vulnerabilities, and even automatically apply fixes.

We have witnessed the loss of 70,000 tech jobs in California since the beginning of 2023; 18,000 of those are in software development. We have also witnessed the elimination of 50,000 jobs in TV, Film and Sound recording, also since early 2023.

AI is rapidly advancing in areas like 3D modeling, character design, and environment design, displacing traditional modelers, designers, the need for expensive sets or filming on location. Google Veo 3 is a video generation model that produces cinematic visuals, voice generation and lip-syncing for characters, and adding ambient sound and music. It is designed for  businesses to produce short films and ads. AI-powered tools including Veo are accelerating video editing, special effects creation, script writing, animation, art in general, and many post-production tasks, which has led to the need for fewer professionals and technicians in these areas.

Surveys have shown that AI has already displaced many workers in the information, entertainment, and gaming industries,

and that it has also created new job opportunities [1]. However at this point, the layoffs appear to have far offset jobs created.

Yet the labor market shows very little trauma as a result.  Despite minimal job creation in California this year, the unemployment rate is 5.3 percent and relatively stable over the last 12 months. It has actually declined modestly since December.

As AI matures in tandem with the physical capabilities of autonomous vehicles, taxi drivers, uber drivers, bus drivers, and truck drivers will be largely eliminated. As robotics that lift, move, and sort continue to advance, the factory and warehouse workforce will be meaningfully reduced.

The aging population of the state (and nation) is demanding more human healthcare resources than AI can currently displace. Healthcare is the only private labor market that has consistently created jobs over the last 5 years. But even here, AI is now capable of replacing social workers, therapists, nursing assistants, and laboratory technicians. This will undoubtedly begin to reduce the rate of positive job growth that we’ve been observing in California healthcare since 2020.

Employment in all other industries is now consolidating, largely due to the rapid onset of AI.

While California’s population was in decline between 2019 and 2022, a turnaround occurred with modest growth in 2023 and 2024. This was entirely driven by a rebound in immigration across the southern border. In early 2025, border security was strengthened, resulting in fewer new immigrants arriving at southern and northern entry points.

As the decline in California’s population resumes (due to few new immigrants and deportations of illegal immigrants), limited labor force growth will coincide with the AI induced slowdown in job growth. Unemployment is very likely to rise in California in the second half of 2025 and 2026, but significant trauma is not in the forecast.

The onset of AI has occurred rapidly, becoming adopted in a more widespread fashion by all sectors of the economy. AI has generated significant cost savings in technology, the financial sector, real estate, manufacturing, video and sound recording, and professional services.  A large part of these cost savings have come at the expense of jobs, a condition that is unlikely to change as AI becomes both smarter and more pervasive in the economy.

But at the same time, job formation in the form of developing, maintaining, and overseeing AI systems is expected. New opportunities have and will continue to emerge in AI engineering, data science and data adaptation, AI training, AI ethics, and AI safety specialists.

Up to now however, it appears that new AI job creation will not offset jobs displaced by AI. Consequently, this becomes a pressing social issue that will need to be addressed as AI evolves.

[1] Los Angeles Times, “Why Hollywood Studios are Downsizing,” June 15, 2025

Mark Schniepp
June 2025

The key issues for the California economy in 2025 include the effect of new foreign trade policy, attempts to reduce federal government spending, and the onset of AI in most industries, especially technology and advanced manufacturing.

Reductions in federal spending could impact healthcare activity in California, namely Medi-Cal. The void in spending would have to be made up by State revenues. However, the State is currently in a horrific condition regarding its annual budget, for both fiscal 2024-2025 and 2025-2026.

Deficits of $45 billion in the current fiscal year and another $12 billion in 2025-2026 are facing the legislature.

It is likely that no cuts to Medi-Cal will occur, keeping the healthcare industry in California—one of only three labor market sectors to create jobs in 2024 and 2025—growing.

To date, the healthcare sector is not only the leading sector for job creation in the State, but the only private labor market that is creating jobs.  Employment in all other industries is now consolidating, largely due to the rapid onset of AI which has been the case since 2023.

California faces a shortfall in tax revenue that will likely result in some consolidation of state and local government employment this calendar year.

New Development in California

In February, the Associated General Contractors of California survey of respondents was optimistic regarding construction business activity in 2025. Nearly 63 percent of those surveyed expect modest growth in overall business activity this year.

Beginning in February however, tough tariff talk shook the stock market, and caused delays among some of the nation’s largest employers in hiring. The uncertainty associated with how tariffs might interrupt supply chains for construction materials along with unknown cost hikes due to tariffs has delayed project starts this year.

Building permits for housing are lower as builders grapple with the uncertainty. The NAHB Housing Market Index  is a gauge of home builder sentiment and expectations regarding the single-family housing market tracking builders’ perceptions of current sales, sales expectations for the next six months, and traffic of prospective buyers. Those perceptions are relatively pessimistic. Consequently, the pace of new housing permits in 2025 is now at the lowest level since 2015.

Nevertheless, there are many large housing projects that are moving forward this year, in many of the larger markets of the state. The largest include the Southeast Development project in Fresno, with 45,000 residential units, the Brooklyn Basin in Oakland, Silverwood in Hesperia, Riverstone in Madera, Related Bristol in Santa Ana, Valencia in Santa Clarita, and Stonestown in San Francisco.

Infrastructure projects in California continue to dominate construction activity in 2025, including the
airport modernization projects at LAX and San Diego International, the California High Speed Rail, and the BART Silicon Valley tunneling project.

The Bullet train however, is now facing significant funding challenges in addition to ongoing cost overruns. Last week, the Federal Department of Transportation proposed cutting $4 billion in funding, along with another $2 billion from the Federal Railroad Administration unless the project can demonstrate compliance.

The largest dam removal project in U.S. history is underway in northern California, called the Klamath River project.

The concerns regarding California’s construction industry last year were principally the scarcity of skilled labor.  The same concern is present this year.

Though prices for certain construction materials are still high, the worry over tariffs and how they might impact building material prices has generated uncertainty among builders. Consequently, a softening in the total construction workforce this year is due mainly to hesitancy in project starts.

More clarity regarding tariffs and building costs is unfolding as the year progresses. It appears that 10 percent tariffs will prevail, on most country’s products coming in. And a deal has been struck with China regarding rare earth minerals though the tariff rate is much higher on all goods. Construction products will be subject to a 55 percent tariff at this writing.  It is my opinion that much of this tariff will be borne by the manufacturers.

Construction costs in general have pushed higher over the last two months due to recent upward movements in steel and cement.

Recent Economic Evidence 

Tourism in California remains a key engine of growth. Though Canadian visitors have declined 14 percent this year, total international visitors are off about 1 percent compared to a year ago. And many tourist venues and attractions are still recording high levels of attendance largely from resident Californians. Hotel/motel utilization in 2025 is about the same as last year, though hotel prices are higher by three percent this year.

The Office market is still weak but turnarounds in office utilization are finally occurring in San Francisco, San Jose, Orange County, San Diego County, and the Inland Empire. Elsewhere in large metro areas, utilization continues to modestly decline.

The onset of AI has occurred rapidly, becoming adopted in a more widespread fashion by all sectors of the economy. AI has generated significant cost savings in technology, the financial sector, real estate, manufacturing, and professional services.  A large part of these cost savings have come at the expense of jobs. In the technology services sector alone, AI has displaced an estimated 70,000 jobs since early 2023.

Foreign trade volumes at the Ports of Oakland, LA and Long Beach have faltered in recent months, due largely to the tough tariff talk that has reduced incoming container traffic and therefore goods flow into the states warehouses and distribution facilities.  This situation is likely to change when tariff policy is sorted out with our largest trading partners, including China, Canada, Mexico, and Europe. For now, however, there has been a decline in logistics employment (truck drivers, warehouse workers, water transportation workers) which has further placed a meaningful drag on the labor market this year.

Existing home selling prices are now at all-time record highs in most counties of California. Though the existing home market remains weak, sales are higher this year as inventory rises for the first time in nearly a decade.  With much of the uncertainty that bogged down new housing project starts in the first half of 2025 now dissipating, and with the likelihood of some mortgage rate relief over the next 6 months, the housing market should modestly improve going forward.

The Outlook for California in 2025

The resilience of consumer spending, amid contractions in (1) domestic investment due to prolonged uncertainty and (2) government spending from overdue government downsizing, a slight contraction in GDP growth occurred in the first quarter of 2025. Second quarter growth is much more stable and relatively strong.  Recession will be avoided at the national and state level, despite the weakness of the California labor market in the first 4 months of the year.

The most likely outlook for California is that the Trump administration’s economic policies will diminish economic activity but not derail it. The President has course corrected, and stock prices which were down 16 percent for the year on April 8, are now positive for the year at mid-June.  Consumers continue to spend and business investment in AI and other software and equipment will strengthen over the second half of the year.

With inflation becoming contained, it is likely that another Federal Reserve rate cut or two will occur before the end of 2025, modestly helping both the new and existing housing sector.

Growth in California is forecast to rise about 1.4 percent in 2025 and 2.2 percent in 2026.  There will be fewer tourists from Canada, and China for that matter, but the visitor industry will still remain busy.

There will be superior growth in advanced manufacturing in California in aerospace products, computer boards and products, and medical devices, but AI will continue to replace jobs.

New development will remain the largest engine of growth this year, likely offsetting the weakness in the State’s economy from downsizing labor markets, a weak office market, and recovering international trade.

Manfred Keil and Mark Schniepp
May 2025

A host of important economic statistics became available last week to give us insights into the current state of the U.S. economy. There was negative
quarterly growth of real GDP, with output shrinking by 0.3 percent; the unemployment rate remained unchanged at 4.2 percent but job numbers showing a better than expected increase of 177,000; and the yearly inflation rate fell slightly towards the Fed’s target judging by both the Federal Reserve’s preferred measure and the headline making consumer price index (2.3 percent and 2.4 percent respectively).

The recent data deliver a mixed picture and does not yield a clear answer of where we are heading. Certainly, these statistics alone do not justify forecasts of a downturn later in the year. It is the uncertainty that has raised the prospect of recession in 2025. The so-called soft-landing (reduction in inflation without causing a recession) is still a possibility, and the dreaded stagflation scenario (low GDP growth with stubborn inflation) has not materialized, yet.

Some have pointed to the fact that the negative growth in GDP was related to both households and firms hoarding imported goods to beat tariff related future price increases. After all, imports rose by over 41 percent (annualized) from the last quarter, which is of an order of magnitude only seen twice over the half century. Unfortunately, this is wrong, since GDP only measures domestic production or aggregate demand for domestic goods. GDP is neutral to imports, unless there are measurement errors.

Two quarters of negative GDP growth are commonly perceived as the start of a recession. This suggests that if we observe negative real GDP growth in 2025 Q2, then the recession started in the current quarter. Unfortunately, this definition of a recession is false. It is the dating committee of the National Bureau of Economic Research (NBER) that determines the start and end of recessions, and it does so by month. The Great Recession of December 2007 to July 2009 would not have been labeled such if you went by the “two quarter” definition: there was positive economic growth during the second quarter of 2008. Unfortunately the NBER typically publishes the start of a recession with a considerable delay: it took the committee 12 months (December 2008), to date the peak of the previous economic expansion. This does not make it useful to pursue alternative policies or to prepare for a downturn.

One of the earliest signs that we are in a recession will come from the so-called Sahm rule developed by Claudia Sahm in 2019 to identify early stages of a recession. The rule focuses on the unemployment rate and a warning is triggered when the rate rises by a certain amount relative to where it was over the last year. There have been almost no false positives using the Sahm rule to predict a recession over the last 80 years. The measure today is not  indicating a recession, and even another quarter of negative growth is unlikely to generate one.

A chart of the Sahm rule in action

There are other “sensors” that, similar to a volcano outbreak, predict disaster. The Conference Board summarizes these in a so-called Index of Leading Economic Indicators. The series is a weighted average of twelve measures including the S&P 500 composite index, housing starts, consumer sentiment index, new durable goods orders, etc., and, as a rule of thumb, rings alarm bells of a subsequent recession  if it turns southward for a series of consecutive months. This statistic is implying we may be reaching the threshold for recession.

Finally, 45 percent of economists polled by the Wall Street Journal have forecasted a recession within a year. However, this is the same bunch who, in October 2022, felt that a downturn was imminent (63 percent at that time). This became known as the “Godot Recession.” In Samuel Becket’s play ‘Waiting for Godot,’ the messenger repeatedly arrives to announce  that Mr. Godot could not make it today but surely would come tomorrow.

Consumers are clearly on edge as the consumer confidence and sentiment indices have fallen to recession territory levels. Given current fundamentals, it is difficult to forecast a reversal in confidence. But movements in consumer sentiment, even large ones like those seen recently, do not necessarily generate similar moves in real consumer spending. If there was such a correlation, we would undoubtedly be in a recession by now.

The case for a recession in 2025 stems from ongoing uncertainty which is delaying domestic investment decisions (and therefore domestic business spending), and less government spending by the administration to directly address corruption, fraud, and waste. However, domestic consumption – the largest component of GDP and the main driver of growth – is less likely to weaken. This is because consumer spending remained resilient in the first quarter and a near fully employed labor market continues to support household incomes, enabling continued consumer spending throughout the year.

The resilience of consumer spending, amid contractions in domestic investment due to prolonged uncertainty and government spending from overdue government downsizing, could result in another one or even two quarters of negative GDP growth this year, potentially prompting the NBER to declare a recession. However, given that consumer spending remains stable, the most likely scenario based on the current evidence is a recession that would be shallow and brief, with its duration limited by the eventual resolution of uncertainty.

The most likely baseline outlook for the economy is that the Trump administration’s economic policies will diminish the U.S. economy but not derail it. It is our belief that the president will pivot on his policies in time to avoid recession. This occurs when it becomes clear that without a course correction, stock prices will decline further, consumers would become so fearful they stop spending, and the economy would suffer a bona fide downturn.

Manfred Keil is Chief Economist, Inland Empire Economic Partnership, and Associate Director, Lowe Institute of Political Economy, Robert Day School of Economics and Finance, Claremont McKenna College. Mark Schniepp is the Director of the California Economic Forecast.

Mark Schniepp
April 2025

Rates and Tariffs

Interest rates have been benefitting from the market chaos that’s been hurting stock prices, especially the freefall declines in value on April 3, 4, and 7 which represented a 15 percent decline. In tandem with stock prices, yields on the 10-year Treasury bond have also been in a freefall during the first week of April. This has lowered the mortgage rate to its lowest level in months. However, it is now at 6.52 percent. Whether this was an intentional outcome or merely a fortunate byproduct, it represents a measure of relief.

As somewhat of a surprise, U.S. companies will now have to grapple with the implications of much larger-than-expected reciprocal tariffs announced on Liberation Day, April 2, and detailed on April 4. They will also have to consider impacts of any retaliation that follows.

The tariff formula put in place this month represents a major shift in our foreign trade strategy, designed to adjust global commerce incentives. Trump claims to be restoring fairness to a system long skewed against U.S. producers. The formula introduces a principal of proportional fairness on our trading partners which invites negotiation in the hopes of reducing the level of tariff or entirely eliminating it.

The tariffs imposed on all countries that the U.S. trades with—all 185—claim to embody a “half reciprocal” approach. Whatever tariff a country charges the U.S., only half as much will be charged on goods coming into the U.S. from that country. Consequently, the new tariff policy is actually restrained. The problem however is that actual trade barrier tariffs are not charged on our incoming goods, at least not to the extent to which the administration claims. The half reciprocal U.S. tariff is estimated as what is approximately necessary to balance trade value with each country, that is: Import value = export value, country by country.

The trade balance formula for “half reciprocal tariffs”

Tariff retaliation is not likely because our trading partners will find it more economically advantageous to lower their own tariffs rather than retaliate with higher ones. However, China did retaliate and now we are in a trade war. This is not being well received by the stock market.

DOGE

Most of the impact from DOGE-fueled spending and employment cuts have yet to be seen. The work of DOGE has reduced federal government payroll employment to date with many more layoffs likely in the coming months despite all the legal injunctions that have delayed thousands of job terminations.

Monitoring layoffs and unemployment

To date in 2025, there has been no evidence that private sector layoffs or unemployment are rising. We use the monthly Challenger Report on layoffs and the weekly unemployment insurance claim reports to monitor the possibility of higher rates of unemployment.

In the latest report, of the just over 275,000 job cuts in March announced by U.S.-based employers, 80 percent of those were federal government workers whose employment status was terminated by DOGE. This signals that the public sector will likely become a headwind to job growth over the next several months. The recent Supreme Court ruling that the order to reinstate thousands of fired federal workers be lifted, will substantially raise layoffs in April.

In March however, the employment report showed that job growth came in at 228,000 which was way above expectations.  During the first 3 months of 2025, employment gains are averaging just 152,000 per month. By comparison, the labor market averaged 168,000 jobs per month in 2024 and 216,000 in 2023. So, while there is a slowdown in job creation, there is also a more meaningful slowdown in immigration through the southern border which has limited the extent to which the labor market can create new jobs when there are fewer job seekers. The unemployment rate for March ticked up slightly to 4.2 percent and has been moving in a narrow range of 4.0 to 4.2 percent every month for the last 10 months.

Stock Market

The latest bear run has been alarming for the equity market.  All of the major market indices have been in a freefall. The Dow Jones Industrial Index declined 7.9 percent during the week ending April 4 and is off 9.9 percent for the year so far. The S&P 500 was down 9.1 percent during the week and is down 14.1 percent in 2025.  The Nasdaq was down 10 percent for the week and down 19 percent year-to-date in 2025. The mood of the Stock Market over the last month has been to shoot first and ask questions later.

This is occurring at a time when there are no clear signs that economic conditions are beginning to deteriorate — either domestically or globally. The recent evidence shows that manufacturing output is expanding, new orders for manufactured products are higher, residential construction spending is increasing in 2025, new car sales had a breakout month of March, labor markets are still creating jobs at a significant rate, and the unemployment rate is stable. So, while there is simply not much trauma in the U.S. economy, the uncertainty of how the new tariff and government downsizing regime will impact the economy is sending investors to cover.

On the bright side, U.S. equity markets are finally beginning to approach levels where valuations are becoming attractive enough to start planning for future purchases. While this may not yet be the time for buying in earnest, this is the moment to prepare. The more compelling entry point is when PE ratios drop below 20, if they at all get there.

Mark Schniepp
March 2025

With the nation now amid an age of uncertainty, I hope the “age” lasts just a month or two. Markets loathe uncertainty, especially the capital markets.

The uncertainty comes from the post haste implementation of policies of the new administration.  The uncertainty is supporting investor ambivalence in the stock market, consumer ambivalence regarding present and future opportunities for jobs, income and spending, and employer worry regarding the availability of an adequate labor force.

Policies

The principal policies of the new administration are as follows:

• Identify and terminate wasteful spending in government.

• Enforce immigration laws at the northern and southern borders, and deport illegal migrants who have entered the country over the last 4 years.

• Restructure international trade policy to focus on “America First” principles, prioritizing trade agreements that are advantageous to the U.S. This includes imposing tariffs on countries with unfair trade practices towards the United States.

DOGE has identified what it believes as obvious government waste in the form of bloated or nonsensical spending. Thousands of federal workers have been fired or asked to quit with a generous severance.

Border policies have now been enforced. Immigration has been reduced by over 90 percent. And deportations are well underway.

Tariffs were imposed on Canada, Mexico, and China. The tariff rate is 25 percent for the our neighbors and 10 percent on all Chinese imports.  On March 6 however, tariffs were paused on imports from Canada and Mexico until April 2, prolonging uncertainty further.

While many people believe that these measures are both necessary and noble, and support the America First principals
that the Trump candidacy espoused throughout the campaign, they will also disrupt the status quo and create economic impacts that will result in some short term pain.  That pain can manifest in the form of higher prices, perhaps leading to a spurt of inflation in coming months.  Inflation might be impacted by higher prices for imported goods coming from tariffed countries.  It might also be impacted by higher wages that must be paid to attract new and legal workers into those labor markets that employed illegal migrants who are now at risk of deportation. GDP growth in 2025 could also be impacted.

C + I + G + X – M                             

This is the equation for GDP, equal to the sum of consumption expenditures by consumers, investment spending by businesses, government spending, and export value minus import value.

G is on the chopping block, and even if you believe that many of the programs getting terminated and many federal employees being laid off are indeed wasteful and not in the best interest of Americans, reduced government spending will lower GDP this year, if the change is not offset by increased C, I, or X.

Trade policy will be characterized by reducing trade deficits, defined as X – M where M is greater than X.  Policies using tariffs will try to boost X and reduce M, this policy would increase GDP providing there is no reduction in C or I as a result of the imposition of tariffs.

But C and I may ultimately be negatively impacted by higher prices on imported goods due to tariffs.

Unknown Economic Impacts = Uncertainty

Border policy and enforcing U.S. immigration policy will reduce migration into the U.S. and the labor force of potential workers needed to fill positions in leisure and hospitality, healthcare, and construction.

Consequently, the uncertainty today is due to changes in the status quo that will likely impact the economy, but that are largely unknown.  Just how high and for how long will tariffs will be implemented, and will there be adequate and affordable substitution effects for consumers as alternatives to tariffed goods.

Moreover, the uncertainty today will also persist regarding how many deportations will occur that would meaningfully impact the workforce, increasing labor costs for employers. How many federal government employees will be laid off, which would raise the unemployment rate in D.C. and Virginia if replacement jobs are not found in a timely manner. Jobless claims will be critical to watch in the coming weeks to determine the magnitude of potential labor market disruption.

Ending wasteful government programs and reducing the federal government workforce would reduce overall government expenditures which would shrink the federal budget deficit providing Congress acts to cut programs permanently out of the FY25 and FY26 appropriations.  Successful budget cutting would rally the bond market, reducing longer term interest rates, which by itself, would increas consumption and investment.

The unknowns are generally unnerving to consumers, businesses and investors. And to date, consumer and business sentiment have declined, home builder confidence has declined, and stock prices are moving lower. In the aggregate their change since the beginning of the year is negative.

The next 3 months

Course correction is possible if current policies being pursued by the new administration lead to an erosion in economic growth, rising unemployment, or accelerating inflation. I don’t believe the economic impacts will be severe. Tariff policy may be short lived. Deportations may not be substantial enough this year to meaningfully affect the labor force and wage inflation. And large government expenditure reductions may not be embraced by a bold enough Congress willing to cut them out of this year’s budget, and the FY26 budget.

Over time, a reduction in government spending is imperative if federal debt is to be reckoned with, which is necessary to lower longer term interest rates.  Hopefully current policies are a signal that the new administration is serious in finding redress for government programs or directions that appear disconnected to an American First agenda.

Our forecast is for the unemployment rate to rise slightly to 4.1 percent after dropping to 4 percent in January.  We also predict that the threat of tariffs on Canada and Mexico are likely  to be reduced or never implemented if concessions from the two countries are made to help secure the northern and southern borders.

While the current environment is chaotic, I believe it presents a significant long-term opportunity, based primarily on U.S. market’s ability to adapt to change. Just as certain policy developments in the 1980s and 1990s ultimately sparked an era of growth, the changes to the status quo that we are witnessing today could have a similar transformative effect.

Mark Schniepp
February 2025

What the Indicators are Saying

GDP rose 2.3 percent in the fourth quarter of 2024, and 2.5 percent for the calendar year. GDP growth in the first quarter to date is estimated at 2.9 percent (February 7) by the Atlanta Federal Reserve’s GDPNOW model.

Manufacturing has now turned around and is expanding in the U.S. again

The Institute of Supply Management Purchasing Index pushed above 50, indicating positive growth in manufacturing orders during January.

Incomes are rising as expected. There is continued growth in wages. The outlook is bright for income growth looking forward, as the labor market remains on solid footing.

The Job Openings and Labor Turnover Survey remains steady regarding hiring, quits and layoffs in the labor market.  In December, hiring and separations through quits or layoffs both increased. Though still at a modest level, the slower pace of layoffs (which remain historically soft) continue to ensure job growth. The unemployment rate for January slipped further, to 4.0 percent.

Spending growth by consumers finished 2024 on a high note, rising as much as wages and contributing to a solid 4.1 percent year-over-year growth in retail sales during December.

New home sales were higher in December. As homebuyers contend with an increasingly limited supply of existing homes for sale, many are turning to the new-home market.

I expect a rate cut by the Fed in the first or second quarter, and perhaps a second cut in late summer.  Lower rates will reduce builders’ costs of loans for capital and land development, reducing the cost of construction.  This assumes no extraordinary increases in material costs. Over the last 9 months, construction cost
inflation has been unusually tame, averaging 1.9 percent in California.

Policy and the Economy in 2025

Fed cuts to the funds rate are unlikely to push mortgage rates down, but the progress being made toward balancing the federal budget by Elon Musk and DOGE would result in lower 10 year treasury bond yields and lower mortgage rates.

The Fed will remain concerned about rising inflation due to elevated wage growth. Consequently, after 100 basis points of federal funds rate reductions in 2024, the timing of further Fed cuts has become less certain, indicating a more gradual, data-driven approach in 2025.

Despite the volatility and seemingly lateral movement in prices since early December, the 3 major indices of the U.S. stock market are all higher to date in 2025.

The market is holding together relatively well despite the uncertainty that investors feel regarding tariff policy, the federal deficit, and interest rates.  Whereas DOGE can and is identifying where government spending appears to be wasteful, it is up to Congress to do something about it.  And there is nothing out of the House yet that would signal they are serious about cutting spending in a meaningful way.

Furthermore, any larger than expected government spending cuts would pose a downside risk to U.S. growth. But at the same time, this would likely push long term rates lower, offsetting less federal spending with higher levels of private investment and consumer spending.

The administration’s plan to renew the 2017 tax cuts and augment them with no taxes on tips, overtime, and social security would enhance growth prospects this year. Consequently, there is significant potential for higher-than-expected growth in 2025, providing the unknowns don’t slow the current momentum in the economy, which is now running at an above average pace. We are predicting that the economy will progress at a healthy clip near term, but the pace of growth will moderate.

Mark Schniepp
January 2025

The big three campaign issues of the new administration that allegedly resonated with the electorate were:

• Improving the economy and restoring low inflation
• Securing the southern (and northern) border of the country
• Resolving the Ukraine-Russia conflict and restoring peace in general

Paying off federal debt                              

A meaningful reduction in government spending recommended by DOGE and sanctioned by Congress could actually balance the annual federal budget and make inroads on debt reduction. This would be the first time since the 1990s. However, we all know there are inefficiencies in government program spending. Identifying them and pressuring the House to develop appropriation bills to nix federal programs, grants, transfers, and general spending is needed to reduce the debt.

Debt reduction would help to keep interest rates lower and spending limitations would help to keep inflation at bay.

Expand Oil Drilling                                     

Oil production is already at record levels but is still subject to high royalty rates when conducted on federal lands.
Also, there are significant regulatory obstacles including local discretionary approvals that could be eliminated to enable expanded drilling, lower operating costs and incentivize more production in the Permian basin (Texas and New Mexico), the Williston Basin (North Dakota), and the Gulf of Mexico.

More domestic energy production would increase world supply providing OPEC does not restrain member production in response. Crude oil prices would decline.

Taming Inflation                                         

Inflation is already moving in the direction of being tamed, meaning that the rate of general price increases is returning to the inflation environment that prevailed during the Trump 1.0 years. However, rate cuts by the Fed are an economic growth stimulus that we don’t need. According to GDPNOW, fourth quarter growth was 3.1 percent, a level that could compromise continuing progress on inflation.

Furthermore, inflation reduction will be more likely (1) at lower levels of government spending, (2) with progress on the Federal debt, and (3) enabling expansive energy production from all sources.

Extend the tax cuts                                    

The tax cuts are already in place from 2017. They expire on December 31, 2025. This gives Congress a sufficient window of opportunity to reconsider how to structure tax policies to balance so that spending does not exceed revenue. If Congress chooses not to extend the 2017 Tax Cuts and Jobs Act, an effective and meaningful tax hike will occur.  The tax hike will impact middle and higher income American families. The corporate tax rate of 21 percent does not expire, but it could be raised back to 35 percent if lawmakers choose to reopen the tax code.  Maximum tax rates will revert back to 39.6 percent (from 37 percent now). The standard deductions which usually impacts lower income households will be cut in half, and child tax credits will deflate from $2,000 per child to $1,000. Households with $400,000 in income would realize diminishing value of the mortgage interest deduction and charitable deductions.

Sole Proprietorships and S corporations will no longer be able to deduct up to 20 percent of business income when calculating annual taxes.  Consequently, small businesses and gig employees will face a stiffer tax burden.

Gift and Estate taxes will revert back to the $5 million exemption level, from $13.6 million under the Trump tax cuts that have been in place since 2017.

By extending the tax act of 2017, Trump also wants to eliminate taxes on tipped wages, overtime, and Social Security payments. These programs would increase disposable income for lower wage earners and for seniors which would enable more household spending and in theory, accelerated growth of the economy.

Tariffs on China and other countries     

The initial round of tariffs imposed in 2018 and 2019 are still in effect on China and were even increased under the Biden administration last spring. Tariffs may result in marginally higher costs to consumers but not much impact was detected as a result of the first round of tariffs.[1]  It appears that much of the tariff burden was eaten by Chinese manufacturers and not passed on in the form of higher prices to American consumers.

What the new administration is thinking regarding actual implementation of tariffs has not been articulated. Only general saber-rattling statements by Trump, probably in the spirit of preparing for negotiations with our key trading partners, has been reported.

For Mexico and Canada, their hope appears to be that Trump’s threats are mere negotiation ploys to which concessions can be made even before he takes office. The threat of tariffs against Mexico has already cajoled Mexican President Claudia Sheinbaum to agree to stem illegal migration across the border into the U.S.

While tariffs would increase federal revenues, the totality of collections would unlikely be meaningful.  Furthermore, we don’t believe a new round of tariffs in 2025 will be either substantial or pervasive because this could counter Trumps bigger pledge to reduce inflation and increase economic growth.

End the Ukraine Russia war                     

Concessions will have to be made by Ukraine to end the conflict with Russia, but ending the war will result in substantial economic benefits for the European economy.  It will free up and enable expanded Ukrainian agricultural production—especially corn and wheat—which is highly coveted by China, Spain, Turkey, Italy, the Netherlands, and Egypt.  Ukraine is the world’s top producer of Sunflower oil, much of it exported to EU countries first, China second, and India third.

The Russian economy has been significantly impacted, largely by the exit of 1,200 major multinational firms that fled the country in protest. This resulted in a major shutdown of the economy. Some sectors are off 60 to 90 percent in total production. Energy exports have been cut in half, especially natural gas which lost a major delivery pipeline (the Nord Stream) into Germany when a series of underwater explosions rendered it inoperable in 2022.

Ending the war would remove any need by Congress to continue financing it, and therefore reduce one large area of government spending.

Trumponomics 2.0 Summary

The principal parts of the new plan are to reassert the Trump 1.0 tax cuts, extend them further, significantly cut government spending, impound previously appropriated Congressional funding, onshore more U.S. company production, deport illegal aliens, and threaten tariffs on, and the withdrawal of economic aid, to countries whose behavior unequivocally harms U.S. interests and/or policies.

The reaction of the stock market and the broader economy will represent a real check on Trump trade policies. Progress on inflation poses a further check.

This is why there is rising probability that inflation could remain a problem in 2025 and stay above the Fed’s 2 percent target. As of November, the core measures of CPI and the Personal Consumption Expenditure Price Deflator together averaged 3.0 percent. The hope that inflation will come down in 2025 will remain an issue and depend on trade strategies and getting control of federal spending.

¹ Associated Press, “Trump’s tariffs did little to alter the economy, but this time could be different,” November 28, 2024,

https://apnews.com/article/trump-tariffs-china-mexico-canada-fentanyl-inflation-cf905e75e863511baef959a80ee2eea2

Mark Schniepp
December 2, 2024

Far from great, 2024 was a good year

This year—2024—was a much better year than economists predicted.  A year ago, there was more talk of a looming recession, or very slow growth predicted for 2024.  The labor markets however, remained strong, consumers continued to spend, investor buying extended the bull market into its third year, and businesses generated profits.

Moreover, consumer spending levels along with the stock market raced to all-time record highs and business investment also peaked in 2024.

But 2024 was also unsettled by wars in Ukraine and the Middle East, by assassination attempts, by unbridled immigration across the southern border, by high interest rates and the ongoing weakness in the housing market, high costs for healthcare, and record levels of U.S. debt.

Inflation fell below 3.0 percent for the first time since March 2021.

Mortgage rates sharply declined 100 basis points between early May and mid-September, but they rebounded in the fall and at their current level, 6.8 percent, they cannot rescue the housing market.

Federal debt is now over $36 trillion and it’s rising at a rate of nearly $2 trillion per year. These high debt levels will prevent interest rates from retracing the lows that prevailed before the pandemic.

Real wages are rising again with inflation in remission.  The unemployment rate remains low at just 4.1 percent. The rate in California is higher, due in large part to the surge of international immigration diverted into the state this year.

The office market remains weak, but the trauma has not yet put banks collectively in trouble.

Though inflation is being contained, the leftover high prices have frustrated consumers. Furthermore, the high rates of interest are a drag on spending, especially lower-income consumers.  This is why the confidence and sentiment indices are not reporting more convincing optimism about the current economy or its near-term outlook.

The GDPNOW estimate for the fourth quarter is running at 3.2 percent. And in view of actual growth for the first three quarters of the year, annual growth of the economy in 2024 will be above the historical trend.

California

In California, the technology sector was coming off a year in which thousands of layoffs occurred, principally in the Bay Area but also impacting the Los Angeles metro area.  The layoff surge did not carry into 2024.

Though tech employment remained stable, tech companies reported strong earnings which pushed their stock valuations to record levels.

The dockworker strike that impacted Westcoast ports and longshoremen jobs in 2023 caused cargo ships with goods from Asia bound for the U.S. to divert through the Panama Canal.

In 2024, shippers came back to Los Angeles, Long Beach and Oakland and seaport container traffic soared.  The logistics sector is no longer hemorrhaging jobs.

There was more stability in the labor markets this year, with the exception of TV, film, and sound recording. The labor disputes affecting actors and writers that were fully resolved by November 2023 have had lasting consequences for Hollywood jobs in California this year.  The 40,000 jobs that were shed in 2023 have not yet been restored. Furthermore, most of the job creation is limited to the healthcare and public sectors.

A glaring issue for 2024 has been the immigration surge.  Until this year, we did not actually know the extent of the immigration wave that has flowed through the southern border crossings into the U.S. CBO reports immigrant encounters at nearly 10 million since 2021.

The flow of immigrants is a principal reason for rising unemployment and declining job openings, especially in California where a disproportionate share have been diverted to.

Tourism remained a steady engine of growth for the California economy in 2024. Even with the opening of thousands of new hotel rooms, the rate of transient lodging utilization remained high, indicating increased overnight visitors throughout the state. Furthermore, the number of airline passengers continued to increase at all principal airports in the state, and amusement park attendance will rival 2023 crowd counts which nearly eclipsed pre-pandemic levels. At Universal Studios Hollywood, attendance hit record levels thanks to Super Mario World.

New homebuilding has hung on despite unfriendly mortgage rates for all of 2024. The new home market has supplemented the existing home market where for-sale inventory dropped to all-time record lows.

Momentum carrying into 2025

Inflation reports that continue to move in the direction of the Fed target, together with modest growth that is not pushed higher by more FED interest rate cuts, will translate into lower long-term rates, including mortgage rates.  A Congress that can present fiscally sound appropriation bills in 2025 will also rally the bond market, dropping yields lower.

The weight of the recent evidence, the momentum of tourism in California, and of commodity imports into the Los Angeles, Long Beach and Oakland seaports, will dominate the weakness in local Film and TV production.

The continuing rebound of Chinese visitors into California will add meaningfully to international travel here.  Plan your Disneyland trip in January and February when crowd counts are the lowest.

The implementation of AI, new technologies in autonomous systems, and medical devices will advantage the California economy where much of the innovation in these resources areas is occurring. This includes the Bay Area, Los Angeles and Orange Counties.

Southern California labor markets include a significant presence of workers in advanced manufacturing. Advanced manufacturing includes computer, semi-conductor and electronic components, medical devices and apparatus, and aerospace components and parts. These industries are expected to expand output to meet a growing worldwide demand.

Finally, new development of infrastructure, entertainment venues, medical center and healthcare facilities, and warehouse and distribution centers will remain a principal engine of growth in the region, keeping the construction workforce at peak levels.

Mark Schniepp
November 8, 2024

Long Term Rates Have Moved Higher

The 30 year fixed rate mortgage yield plunged 100 basis point between May and September 2024. The Fed cut short term rates in September, and again on Thursday November 6.

Paradoxically, longer-term interest rates have moved upward since, driving up mortgage rates and other consumer and business borrowing costs.

The 10-year U.S. Treasury yield reached a recent low of 3.64 percent on September 17, the day before the Fed announced its first rate cut. As of November 8, that rate was up to 4.32 percent, an increase of 70 basis points.

So we’re seeing a reversal in longer term rates. Why?

Growth

A vibrant economy that is generally firing on all cylinders will generate inflation. The investor belief is that there is significant confidence in the economy, soon to be impacted by Trump policies which were friendly the last time around. This is pushing the 10 and 30 year treasury bond yields higher as substitution from bonds to stocks continues.

Stock prices like a vibrant economy, and so the markets spiked the day after the election believing a conservative administration will ease government regulations which kneecap the private business sector.

I have long maintained that the ebullience in financial markets over the last couple of months manifesting the day after the election, signals to the Fed that it doesn’t need to cut rates that much more.  The quarter point easing on Thursday, November 7 was not likely necessary. We risk igniting inflation with easing monetary policy.

Record stock prices reflect high expectations for the economy which already has increased household wealth and now makes the corporate borrowing environment more favorable. Hence our outlook for 2025 is one of steady growth and low unemployment.

Government Debt a Factor

I’ve shown you over the last year how Federal debt has risen sharply, due to the inability of Congress to restrain itself from massive spending. The level of federal spending has never returned to the pre-pandemic trajectory. Here it is again, now at $35.9 trillion.

Government debt is financed through issuance of U.S. Treasury bills, notes and bonds. The U.S. Department of the Treasury has been required to issue increasing amounts of debt to fund government operations. The last 2 years of high interest rates means the cost of financing government debt is more expensive.  The average interest rate paid today is more than double what it was in 2020.

One factor that is affecting Treasury bond yields (and therefore higher rates to you) going forward is the expectation of more government bonds coming to market, entirely due to the high federal government debt, the annual government deficit and the higher interest costs associated with today’s elevated interest rates. The supply of debt is therefore increasing, rapidly.

Consequences

Government Debt

The demand for debt is weakening. The demand for 10 year treasury bonds remains low due to the expectation that more bond auctions will be coming. This increases the yield on all treasury term rates to entice buyers.

Higher interest costs, in turn, contribute to the growth of federal spending — continuing a vicious cycle of borrowing, interest, and higher debt. Currently, 22 percent of annual federal expenditures are debt payments. The 2024 payment will be $1.1 trillion. The federal government is on a path to spend more on interest costs than its combined spending on education, research, and infrastructure.

Housing

Higher long term treasury bond rates move mortgage rates in lockstep.  Higher mortgage rates will not rescue the housing market from the recession it’s been in for the last 2 years.  We don’t see a meaningful contribution by housing to overall economic growth in 2025, but it’s not likely to become a drag on growth either.  Higher rates mean less inventory as would be sellers avoid having to finance their next home at current rates. Less inventory means no relief on the rise in selling values, because existing home supply will remain limited.

Delinquency rates

The average personal loan interest rate is 12.4 percent. American consumers owe $249 billion in personal loan debt, through quarter 3 of 2024.  This is up $4 billion from quarter 1. 24 million Americans have a personal loan. The 60-day delinquency rate for personal loans is 3.4 percent, the highest rate since 2012.

Added to personal loan debt, Americans owe $1.14 trillion in credit card debt. The delinquency rate has moved to 3.3 percent, the highest rate since
2011.

While consumer debt is still not that high relative to consumer personal income, it is a rising concern because of (1) its current direction, and (2) the current trajectory of interest rates.