Economic Growth Analysis

Markets are always forward-looking, reacting to future risks rather than past performance. Economic indicators like GDP growth and unemployment provide a snapshot of what has already happened. Right now, the biggest challenge isn’t economic data—it’s strategic future uncertainty. Markets thrive on stability, and when there’s no clear direction on trade policy, investors become cautious, leading to market fluctuations. The key is that any rebalancing of unfair trading practices facing America will necessarily come with a period of short run uncertainty until the uncertainty to what that rebalance entails gets resolved. There is no way to rebalance without short run uncertainty of its eventual outcome. Trade negotiations, particularly around tariffs, are powerful tools, but they come with a trade-off. Keeping strategies unclear and uncertain can strengthen a country’s bargaining position, but it also fuels investor anxiety. Markets don’t react well to unknowns, and when policies remain uncertain, falling prices reflect that hesitation. The challenge is finding a balance—leveraging trade policy as a negotiation tool while ensuring it doesn’t create prolonged instability. In the long run, confidence in the market depends on clear direction, even when strategies require short-term ambiguity. #MarketTrends #TradePolicy #EconomicUncertainty #InvestorConfidence #GlobalMarkets

One headwind for economic growth in 2025 is the tremendous amount of economic policy uncertainty due to current tariff activity by the executive branch. The Federal Reserve Bank of Atlanta recently shared data about the negative impact of tariffs on planned investment activity (https://lnkd.in/gstDznqp). I’ve reproduced two charts from the data they provided. Thoughts: •The top chart provides responses to the question, “How has uncertainty about tariffs, taxes, government spending, monetary policy, or regulation affected your firm’s plans for hiring/investment over the next 6 months?” Over 40% of respondents stated they would scale back hiring plans and investments in response to economic uncertainty, with less than 5% stating they would expand hiring/investment. This scaling back points to slower growth in the coming months. •The bottom chart shows responses to the question, “What is your firm’s top concern with respect to uncertainty affecting your firm’s hiring/investment plans over the next 6 months?” We clearly see tariffs dominate the conversation, with more than 50 percent of respondents noting tariffs are the top source of uncertainty. Implication: Federal Reserve survey data from N = 961 firms points to tariff-induced uncertainty causing business to scale back hiring and investment plans over the coming months. There is a tremendous body of economic literature detailing the negative effects of economic policy uncertainty in terms of investment. As I’ve stated before, supply chain managers cannot make effective plans around 90-day windows and not knowing if major policy shifts will occur with short notice. Many are anxiously awaiting news on reciprocal tariff levels come July once the 90-day pause on their implementation ends. #supplychain #economics #markets #shipsandshipping #manufacturing #logistics

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We’re only human Measures of economic policy uncertainty have eclipsed the pandemic. The largest increases are due to trade policy uncertainty and where the US will end up with regard to tariffs. Why do we care? A top 10 list 1. A “wait and see” mentality emerges. Large, hard to reverse spending decisions by firms and households are put on hold. That acts as a drag or tax on economic activity. 2. Business investment feels the bulk of the effects and contracts. 3. Credit conditions tighten, especially for those most exposed to tariffs, which further constrains investment. Even firms with plans to invest can be hobbled. 4. The banking system becomes less stable. Loan defaults pick up as the economy slows. Consumer delinquencies are already on the rise. 5. Unemployment rises as growth slips to levels that no longer enable the economy to absorb those entering the labor force. What is unknown is whether that weakness will cause a further slowdown in wage growth given the stagflationary effects tariffs. Workers tend to demand compensation for the escalation in the cost of living due to tariffs. 6. Consumer spending skips a beat. Job losses confirm fears and and trigger a larger blow to aggregate incomes and spending. 7. Financial market volatility soars and asset prices fall. People lose retirement savings and feel poorer, companies can't raise money by selling stock and loan losses accelerate. Confidence among consumers and busineses further falters. 8. Monetary policy becomes less effective as fear prevents firms and consumers from reacting to stimulus once it starts. 9. Contagion. Foreign firms and governments perceive the US as an unreliable and less predictable partner. Supply chains are reconfigured to reduce their dependence on US markets. 10. If left unchecked, sustained periods of uncertainty can trigger a breakdown of economic and political systems. Five things can help mitigate and derail bouts of uncertainty from becoming a vicious global cycle: 1. Strong institutions. They create confidence that rules won’t arbitrarily change, and work to counter the “wait and see” behaviors that curb growth. The judiciary plays a key role. 2. Clear communications by the Fed. That and a lack of political interference tempers uncertainty regarding the trajectory of inflation. 3. Automatic fiscal stabilizers, which provide immediate, predictable government response without political gridlock that can worsen a crisis. 4. Well capitalized banks, which prevent larger credit crunches from taking root. 5. International cooperation, which limits contagion. Bottom line Bouts of uncertainty trigger fight or flight reactions. That has resulted in a toxic mix of panic and paralysis. Expect whiplash, as the surge in activity ahead of tariffs borrows from growth later in the year. As for national security, that could be shored up with a targeted & strategic approach to industrial policy. Break bread not ties when possible. Be kind; pay it forward.

July’s employment report from the Bureau of Labor Statistics should give the Fed the exclamation point they have been looking for to show that the economy is slowing enough to warrant a rate cut. Market expectations have shifted firmly to a 50-bps interest rate cut at the Fed’s meeting in mid-September, rather than a 25-bps cut which had been the prevailing view prior to this report. Now handwringing will ratchet higher as to whether the Fed is in the process of successfully orchestrating a soft landing or if they have waited too long to shift their monetary policy stance. Job growth slowed more than expected in July and gains in May and June were revised lower. The unemployment rate increased 20 bps during the month and is up 60 bps over the past six months – unemployment rate changes of 50 bps or more over a six-month period have typically corresponded with recessions (see accompanying chart). Wage growth also appears to have slowed over the past couple of months. Even allowing for some volatility in the monthly data, the three-month moving average in employment growth and unemployment show an undeniable softening. Unemployment insurance claims add further evidence to the slowing trend. Initial unemployment claims have ticked higher over the past three weeks and continuing claims are at their highest level since the fourth quarter of 2021. It is difficult to call current labor market conditions weak with the unemployment rate still at 4.3%, but job gains appear increasingly lackluster across major employment sectors and the loss of momentum is undeniable. Stock and bond market participants are reacting in a way that suggests increased recession fears. Earnings reports have only fueled these concerns. The 10-year Treasury rate has fallen materially below 4.0%. Mortgage rates have also been ticking lower, which is good news for prospective home buyers. Rate cuts appear to be on the way, but macroeconomic conditions are increasingly precarious and the Fed’s September meeting may start to feel like a lifetime away if more bad news unfolds. The week ahead is not a busy one from an economic news perspective, but ISM services, mortgage delinquency, Fed Senior Loan Office Survey, and jobless claims, among others will be interesting to watch for additional information on the economy’s trajectory. What indicators are you watching for?

Off to a slow start? LBO transactions are slower than forecast thus far in 2025. Likewise, direct lending deal activity has slowed commensurately, highlighted by the chart below. Deal volume/deal count declined over the past 3 months reflecting broad market caution with GDP forecast to slow. Policy uncertainty is listed as a key concern by CEOs and PE sponsors, alike as fiscal policy and tariffs give reason to pause. This uncertainty contrasts with the pro-growth policies plus less restrictive regulatory landscape that provided hope for investment bankers M&A and PE sponsors alike. The establishment of new tariffs will be announced on April 2nd, which should allow for clarity, but for now has added uncertainty. This has particularly affected tariff-sensitive sectors like industrials, manufacturing, goods distributors that thrive from a fluid import-export market, The uncertainty surrounding tariffs has made it challenging for firms to assess and underwrite deals, further contributing to the slowdown in overall M&A activity. Likewise, investment analysts and credit underwriters must recalibrate their models to address trade uncertainty, a slowing economy that impact revenues, margins, profit margins. Navigating current tariffs, anticipate April 2 changes, account for retaliation, manage sector-specific duties, adapt for onshoring, managing a complex supply-chain, all while economic slowdown and trade uncertainty pressure your bottom line is now a critical part of one’s analysis. My takeaways: - Domestic companies not reliant on international trade provides less risk at the current juncture - Deal volume remains strong in business services and healthcare where tariffs have little impact - ABL transactional volume should not be impacted by what is happening in Direct Lending (diversify your portfolio with ABL) - Opportunistic Credit Managers to benefit as more capital solutions necessary as the economy slows - Existing Portfolios of Direct Loans, where the BDC or Private Credit Fund is already ramped should prove beneficial given lower origination levels (seasoned, delivered portfolios are best) - 2nd Half ‘25 should see stronger deal flow as policy measures become better defined allowing PE sponsors greater clarity

TL;DR: Strong labor supply growth continues to drive labor market cooling and higher unemployment, but employment is holding up ok. 1/ Probably the first detail that jumped out at me in today's jobs report was the increase of the unemployment rate to 4.1%, the highest since late 2021. 2/ Growth in nonfarm employment also appears to be slowing - the 3 month average of 177K per month is the slowest we've seen since early 2021. 3/ HOWEVER: a lot of the "deep cuts" in the report look less concerning. 4/ The increase in unemployment was mostly driven by an increase in new labor force entrants and labor force re-entrants. Unemployment due to permanent layoff actually fell to its lowest level since January. 5/ The share of prime-working-age Americans with a job was unchanged at 80.8% - just shy of a 23 year high. Employment has remained steady even as unemployment has risen - suggesting a rise in "steady state" job search activity rather than job losses. 6/ The share of the labor force that is working part time for economic reasons (people who want full time jobs but can't find them) fell in June to its lowest level of the year. 7/ Job gains were strongest in health care & social assistant (+82K), government (+70K), and professional & business services excluding temp agencies (+32K). The biggest job losses were in temp agencies (-49K), durable goods manufacturing (-10K), and retail trade (-9K).

The U.S. economy added 227,000 #jobs in November, according to Nonfarm Payrolls data from the Bureau of Labor Statistics. This marks a significant rebound from the near-standstill in October, where job creation was heavily impacted by the labor port strike and hurricanes Helene and Milton. The unemployment rate remained steady at 4.2%, indicating a stable job market despite ongoing economic uncertainties. Employment trends showed positive growth in health care, leisure and hospitality, government, and social assistance sectors. However, retail trade experienced job losses, highlighting the mixed nature of the current labor market. Average hourly earnings have continued to rise, indicating persistent wage pressures within the labor market. This reflects the ongoing demand for labor and potential inflationary pressures. Higher wages can lead to elevated inflation down the line as businesses may pass on the increased labor costs to consumers. Investors are grappling with the Fed’s uncertain policy path. Fed Funds futures pricing after the report was released predicts an 87% chance they will cut rates by 0.25% at the December FOMC meeting. We anticipate that the Fed will likely proceed with 0.25% rate cuts unless economic conditions necessitate more significant adjustments.

Spending Falls, Inflation Rises: "Smells Like Stagflation Spirit" May’s spending, income and inflation data from the Bureau of Economic Analysis offered the clearest signs yet of tariffs weighing on the U.S. economy. Consumer spending declined noticeably, following months of front-loaded purchases ahead of expected tariff hikes. Even as demand cooled, inflation continued to edge higher—an early signal of stagflation, the combination of slowing growth and rising prices typically triggered by a supply shock. While inflation has remained within a tolerable range over the past three months, we don’t believe the full effects of tariffs have yet played out. Many businesses have so far absorbed higher input costs by leaning on inventories rather than passing them along to consumers. That buffer may soon erode. We expect increased price volatility over the next three to six months as firms begin restocking at higher, tariff-inflated prices. The Federal Reserve has signaled the possibility of one or two rate cuts this year. But more data will be needed to determine whether inflation pressures are truly under control—or just delayed.

Today’s #jobs report for July 2025 was pretty brutal. Fewer jobs are being created... Economists expected 104k and got 73k. More importantly, revisions for May and June resulted in a combined 258k fewer jobs than previously assumed – job growth in May and June was 19k and 14k respectively. Downward revisions are nothing new in this cycle – but this is pretty bad. Lower job openings and quits rates, published earlier this week, are also discouraging. … but #wages and #unemployment rate still sticky. Despite fewer jobs created, the unemployment rate (now 4.2% up from 4.1%) and wage growth (up to 3.9% YOY from 3.7%) have been persistently sticky. How can both of these things be true at once?   The #LaborMarket is facing both demand- and supply-side shocks. On the demand side, today’s data now shows a clear trend since “Liberation Day”, though layoffs have increased only modestly, uncertainty related to tariffs and other policy change is making businesses hesitant to hire new workers. On the supply side, immigration policy changes have contributed to a smaller labor force, creating further supply-side constraints. Put together, this means that there can be fewer jobs created (less demand for labor) without the typical upward pressure to the unemployment rate and downward pressure on wages.   The result is a really tricky situation for the U.S. economy – and the Fed. Demand appears to be falling, but it’s driven by factors not typically solved by monetary policy. So what should we expect from Fed policy?   The market’s initial interpretation of the data is “lower growth” dovish – the U.S. 10-year yield is down, the U.S. dollar is down relative to other major currencies, equity markets are modestly down, and market pricing of a September rate cut is now up to 85%.   We tend to agree. We’ve been on the ‘hawkish’ side of Fed expectations but believe that policy is currently moderately restrictive – confirmed by Chair Powell’s own views this week – and that the Fed was likely to cut once to signal its path closer to a neutral policy rate.   That said, we discourage investors from assuming a September cut it would signal a series of cuts thereafter. Our Fed cuts checklist still signals risks from all sides:   ----Employment is slowing – but even demand side shocks are likely related to policy change the Fed can’t control ----Inflation risk is still present, and an over-reactive Fed could contribute to de-anchoring inflation expectations ----Financial conditions, including equity valuations, credit spreads, and liquidity, are still loose   The final word: This week’s economic data signal a clear ‘stagflation-lite’ backdrop – and raise the risk of a more entrenched stagflation scenario ahead. We’re cautious on duration risk, with the 10Y likely drifting back toward 4.5% by the next CPI print.