America is getting the economy we voted for - by Noah Smith

The U.S. economy is exhibiting signs of weakness, with August job growth significantly missing expectations at 22,000 versus a projected 75,000, alongside rising unemployment claims and contracting manufacturing activity, indicated by an ISM index of 47.8. Inflation remains persistently above the 2% target at 2.5% and is projected to continue, suggesting underlying supply-side issues rather than solely demand-driven factors. This environment, largely attributed to policy-induced negative supply shocks such as tariffs and immigration crackdowns, creates a dilemma for the Federal Reserve, as anticipated rate cuts to support the labor market risk further exacerbating inflationary pressures.

Analysis

The U.S. economy is exhibiting clear signs of a slowdown, characterized by stagflationary pressures. The labor market is weakening, as evidenced by the August jobs report adding only 22,000 jobs, significantly missing the 75,000 consensus forecast, and cumulative job growth in 2025 being roughly half that of the same period in 2024. This trend is corroborated by multiple data points: ADP private payrolls also missed expectations with a 54,000 increase, initial jobless claims rose to the highest level since June at 237,000, and job openings fell to a 10-month low. Concurrently, inflation remains persistently above the Federal Reserve's 2% target, currently at 2.5%, with markets expecting it to stay elevated. The article attributes this dynamic not to a lapse in aggregate demand, but to negative supply-side shocks stemming from government policy, specifically tariffs and immigration crackdowns. This is strongly supported by the Institute for Supply Management's manufacturing index, which contracted for a sixth straight month to 47.8, with tariffs cited as the primary cause of distress for companies like John Deere (DE). This places the Federal Reserve in a difficult position, as anticipated interest rate cuts intended to stimulate the labor market risk exacerbating inflation, a scenario reminiscent of the 1970s.

Key Decisions for Investors

• Given the risk of a stagflationary environment—weakening growth and persistent inflation—investors should consider reducing exposure to cyclical sectors and re-evaluating positions in companies with low pricing power.
• Review and potentially underweight holdings in the manufacturing sector and companies with significant global supply chain exposure, such as Deere & Co., as they remain highly vulnerable to ongoing trade policy and tariff-related cost pressures.
• Monitor upcoming Federal Reserve communications and inflation data with heightened scrutiny, as rate cuts in the current supply-constrained environment could accelerate inflation and trigger market volatility.
• Factor in elevated political risk, including continued trade policy uncertainty and potential erosion of confidence in official economic data, which warrants a more defensive portfolio posture.