With each passing day, the federal government shutdown raises the stakes for the U.S. economy, especially with respect to GDP growth. According to analysts, a longer shutdown might add an estimated 0.2 to 0.3 percentage points to the annual GDP effect. Latest data shows that U.S. tariffs have not proved to be an economic stability killer, as was once predicted. These new challenges including a commensurate weakening in wage growth as well as flattening in housing rents weigh on CPI forecasts. On the other hand, some other parts of the economy are still making an endurable stand.
Our once-tight labor market is in tatters, with nearly 1.9 Americans unemployed for every job opening. Lately, trade and inventory data have blown through the consensus. In addition, high-income households are reining in their spending, which is important for economic stability in the U.S., as recent data show their spending has flat-lined.
Tariff Implications and Economic Performance
The bottom line on current tariffs paints an incomplete and misleading picture for the U.S. economy. The recently-released tariff schedules for individual countries and sectors show that the overall average rate is closer to 18%. The final rate achieved is just around 10%. This rate is based on the actual July and August trade and customs tax revenues recorded. That’s a good thing, because it means the worst-case effects of tariffs might be less drastic than earlier alarmist predictions.
Topping that off, we got second-quarter GDP growth, which was much stronger than expected at 3.8% annualized. This expansion has laid the groundwork for a dynamic economic recovery as the country heads into Q3. Recent updates to the outlooks have fueled that newfound optimism. Today, forecasts for third-quarter GDP growth have moved up from 1.5% to 2.4%. These figures suggest that the economy has maintained decent momentum despite external pressures.
Labor Market Challenges
Even with the positive growth indicators, the challenges in the U.S. labor market are significant. Today, there are nearly twice as many unemployed Americans as there are job vacancies—a reality that makes reaching full employment all the more difficult. A federal government shutdown that has devastated many local economies has compounded that misery. Yet among its myriad consequences, it has affected nearly three million federal workers—approximately a quarter of those have been furloughed without pay.
Unfortunately, federal workers have only been granted back pay after government shutdowns ended in the past. This precedent should provide some comfort to those impacted. It does little to relieve the immediate economic pressure that most families are under in these times of unprecedented uncertainty and turmoil.
Housing Market Dynamics
The residential construction sector has faced enormous challenges illustrated by five straight monthly decreases in home prices. Such a trend is worrisome for the long-term health of the housing market and its important spillover effects on overall economic growth. Combined with the effects of weaker wage growth and flat housing rents undercutting the outlook for inflation, CPI projections have become that much more challenging to interpret as well.
Trade and inventory data have all surprised to the upside. This illustrates that certain portions of the economy remain resilient, despite the economic distress experienced by others. Higher-income households are still letting loose on spending. Making these higher spending levels permanent is key to keeping demand strong in all sectors — residential, commercial, and institutional.