The past few years show the US economy can withstand many obstacles without rolling over
A sense of economic doom was pervasive after President Trump announced his tariff plan on April 2, which he termed “Liberation Day”. Many forecasters responded by renewing their predictions that a recession will occur within the next year. However, within a week the President announced a 90-day pause and by the end of June the economic outlook seemed brighter. At least so far, the President’s tariff policy does not appear to be having much of a negative effect on the US economy. Inflation has not risen noticeably, unemployment hasn’t spiked, and the S&P 500 Index is hovering around all-time highs again.
The Consumer Price Index (CPI) rose 0.3 percent in June, inching the annual inflation rate a bit higher to 2.7 percent, which is in line with economists’ forecasts and slightly higher than May’s number. Still, the annual inflation rate remains below its ten-year average of 3.2 percent.
So far, the tariffs have had an impact on a limited number of industries. The CPI report showed very few wide-ranging impacts from higher tariffs, but prices rose for some goods typically imported or heavily reliant upon imported materials such as toys, appliances, sporting goods and tools.
Within the affected industries, companies can either absorb the additional costs or pass them along to their customers. Many companies are choosing to do a little of both, only passing a small portion of the higher cost to their customers to protect their market share.
In addition, many companies that import goods pulled their purchases forward during the first quarter of this year to get ahead of the expected rise in price once the tariffs kick in. These businesses have been working through this inventory buildup, which will be replaced with new, higher-cost inventory if the tariff threats turn into action.
President Trump is still threatening to impose the higher tariff rates, but he has pushed back the effective date to August 1st. This has reinforced the sense that President Trump’s bark is worse than his bite because often a newly imposed tariff is eventually reduced or delayed. As a result, companies are looking past his tariff declarations. They are waiting in the anticipation the President will change his mind and lower the tariffs or remove them altogether.
If the President follows through, additional costs will be diverted from the private sector which will also likely be shared between the market participants. Importing companies would post lower margins, consumers would have lower real purchasing power due to the portion being passed along as higher prices, and the amount the exporter absorbs will slow the growth rate in the economy of its country.
The uncertainty of international trade costs has caused confusion, which is dampening economic activity. Both consumers and businesses are waiting to see how it all plays out before making further large purchases. The US Federal Reserve also is in “wait and see” mode.
After the latest Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell said that the strength of the US economy allows the Fed to be in a “good position to wait and see” how various economic factors play out.
The US Economy appears to be in good shape, but with inflation under control investors are increasingly concerned about economic data trends that are gradually slowing. The Conference Board Leading Economic Index has been falling and has triggered its recession signal, although it must be noted that this index has been signaling a recession for much of the past four years without one occurring.
Soft data such as surveys of consumers and corporate leaders have been indicating weakness for several months. Now, weakness is being seen in the hard data. Consumer spending has failed to grow for five months, and shoppers are buying more items at lower price points and prioritizing essentials over impulse purchases.
The June jobs report was solid but contained some cautionary data points. The aggregate number of hours worked in the private sector declined. New jobs are still being created, but the labor force is shrinking. Layoffs are still relatively low, but those that do get laid off are having difficulty finding a job.
The Institute for Supply Management’s Business Activity Index inched higher in June, but remains in a flat trend.
ISM’s Business Activity Index
Source: The Institute for Supply Management
The Housing market is weakening, and some economists fear the weakness could bleed into other parts of the economy. High home prices, shrinking inventory and stubbornly high mortgage rates are damaging affordability for many homebuyers, which is causing demand to fall. The pace of home price increases is slowing compared to recent years in many areas. Some regions, especially in the south and west, are experiencing price declines.
Pending home sales are near record lows according to the National Association of Realtors. The only other time over the past 20 years that pending home sales have been this low was in 2020, during the COVID pandemic.
Source: Axios, The National Association of Realtors
While the US economy may be slowing, it remains very resilient, growing at a consistent 2-3 percent every year since 2022. The current weakness may not be enough to end that streak. The dynamic nature of the United States economy makes it one of the few countries that could withstand a hit to its growth of this magnitude without falling into recession. Also boosting growth this year and next will be the additional stimulus in the “Big Beautiful Bill”, although the resultant increase in government debt will need to be dealt with later.
Stock Markets trended down the first quarter of the year due to worries about America’s
trade, fiscal, and monetary policies, as well as geopolitical concerns. However, the second quarter saw the S&P 500 rebound strongly, surpassing the previous highs reached in February, despite the Liberation Day scare on April 2. For the moment, fears about tariffs, inflation, a slowing economy, and weak corporate and consumer sentiment have dissipated.
Source: The Financial Times, Bloomberg
Technology companies are once again leading the market, with first-quarter results from Big Tech companies showing that the AI investment boom is still going strong.
Investors who have bid up the price of stocks are counting on continued economic resilience, completion of trade deals, and tariff de-escalation. But with the economy gradually slowing and valuations stretched once again, it may be difficult for stocks to add significant price appreciation the rest of this year.
Stock market levels will be tested as companies report their earnings results for the second quarter this month and next. Companies are broadly optimistic that revenues will continue with solid growth, but they are less optimistic about bottom line earnings. Many companies are facing higher costs due to supply chain disruptions and higher interest rates. Comments that are made on the companies’ earnings calls about their expected costs for the rest of this year will go a long way to determining if stocks can hold on to their recent gains. If the higher costs are seen as temporary, the market may look past any near-term earnings weakness.
Fixed income markets have also had to navigate the elevated level of uncertainty in 2025 related to tariffs, heightened geopolitical risks and the ongoing servicing of the large accumulation of sovereign debt incurred by developed countries from pandemic-related spending.
Outstanding central government marketable debt
Source: OECD (2025), Global Debt Report 2025: Financing Growth in a Challenging Debt Market Environment, OECD Publishing, Paris
U.S. Treasury yields twisted around the ten-year area with shorter maturities declining as much as 16 basis points while longer maturities increased up to 20 basis points in the second quarter. Investors are pricing potential interest rate cuts from the FOMC to begin in the second half of the year while showing more caution investing in longer maturity bonds. The approximate 100 basis point difference between the two-year and thirty-year U.S. Treasury maturities is now close to the longer-term median levels (107 basis points since 1980). High quality taxable fixed income strategies had their best six months start to the year since 2020.
The Federal Reserve has voted to maintain their policy rate at approximately 4.4 percent since its December meeting. This stands in contrast to central banks from most other developed economies as the ECB, Bank of England and Bank of Canada have continued to cut rates in 2025. Fed Chair Powell wants to be patient in assessing the possible impact that tariffs might have on inflation and employment. However, there has been growing dissent from FOMC members about maintaining the current policy rate for much longer. Fed Governors Waller and Bowman have suggested that a cut at the July meeting could be appropriate, citing further progress on inflation and minor concerns for labor market weakness.
Corporate credit spreads increased notably in early April and then tightened throughout the rest of the quarter to end 11 basis points lower. Corporate credit has remained resilient during the past couple of years as periodic macro-economic concerns have only briefly impacted valuations. The high absolute level of yields for corporate credit since 2022 has made the asset class more attractive to investors. In addition, corporate creditworthiness has become more attractive relative to global sovereign debt than it has been historically as governments have leveraged their balance sheets materially in the past five years.
Option Adjusted Spread- Bloomberg US Corporate Index
Source: Bloomberg LP
Important Disclosure:
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
Investment Advisory Services offered through HBK Sorce Advisory LLC, d.b.a. HBKS Wealth Advisors. Not FDIC Insured – Not Bank Guaranteed – May Lose Value, Including Loss of Principal – Not Insured By Any State or Federal Agency.
