By Chris Kuehl, managing director, Armada Corporate Intelligence
Volatility remains the dominant theme. A report commissioned by EY asserted that the last 10 years have seen an almost continuous series of significant economic disruptions, and these have cost the Fortune 100 close to $400 billion in profits. There have been pandemics, a collapse of the London gold market, the Ukraine war, tariff and trade wars, and natural disasters that have been coming faster than ever and with more impact. The volatility stems largely from policy shifts. Tariffs are being deployed as negotiating tools rather than as a new trade policy, which means they shift according to the negotiations. The negotiations often are unrelated to the industry affected by the tariffs, and that makes strategic planning awkward. Despite all this confusion and trepidation, the economy has been growing at an impressive pace. The miserable numbers in the first quarter were triggered by excess imports, but the second quarter bounced back and the third quarter is sporting a growth rate of 3.9%.
Inflation and Cost Pressures
The Fed still asserts that it is concerned about stagflation, as the inflation rate has remained above its preferred level and there are emerging signs of a slowdown. The current inflation rate is 2.9% and that has been steadily higher for several months. It also is close to what triggers the Fed to act. The latest move was to lower rates by a quarter point, and there were hints of another rate cut by December. The problem is that an inflation rate above 3.0% usually convinces the Fed to hike rates rather than lower them. The factor that motivated the Fed to lower rates has been the job market. The data right now is not all that bad, but the trends are creating that job confusion.
The yield on the US 10-Year Treasury – a key benchmark for long-term borrowing and mortgage rates – also has been unusually volatile, reflecting broader market uncertainty. The efforts to address the yield concern have been hampered by the mounting deficit. The recent tax and spending bill added about $4.1 trillion to the debt, prompting rating agencies to downgrade the 10-year bond.
Global Strains: Trade, Labor, Supply Chain and Production
The supply chain issues seem to change every few months. Last year, it was a combination of physical issues. This year, it has been a matter of politics, with the trade war and tariffs affecting the pace of imports and exports. The global economic slowdown, which has manifested in the last year, has depressed prices a bit but some of this decline has been offset by reactions to the tariffs. Earlier in the year, the rush to beat the tariffs created a lot of congestion at both outbound and inbound ports, but that eased considerably over the summer.
Trade conflict still is a high risk. Trade tensions between the US and China are not expected to ease in the foreseeable future. This tariff escalation has affected bilateral trade, curtailing the flow of goods between the two nations and triggering widespread supply shortages. The US typically imports over $450 billion in goods from China annually.
At the beginning of the year, there was an expectation of much higher inflation due to the tariffs and other trade issues but this impact did not manifest as expected for three reasons. The first reaction from many suppliers was to simply eat the majority of the extra cost in an attempt to protect market share. The second response was to find an alternative source, which worked until the US started imposing restrictions on those sources as well. Finally, there was the decision to reduce margins and profits to keep prices stable. All three of these tactics began to fade during the summer months, and now the inflationary hit has started to manifest.
The mood at the Federal Reserve has been shifting as evidence of an economic slowdown has begun to emerge. There has been talk of stagflation, although that remains a minority opinion. This is a very rare situation in which the economy suffers from both inflation and a recession at the same time. There is no real evidence that this has developed, but the potential is there.
At the last meeting, the decision was made to cut rates by a quarter point, and the consensus is that another quarter-point reduction will occur by the end of the year. The critical factor in that decision was that Chris Waller shifted his stance and favored that reduction. He has been more of a hawk in prior meetings. Attention now focuses on 2026, and opinions are mixed. It all depends on two factors – the rate of inflation and the rate of unemployment. If inflation keeps growing, the Fed’s goal still is thought to be between 3.0% and 3.2% at most, and right now the rate is very close to that level. The trade war will affect inflation, but there also will likely be an economic slowdown.
The question is: Which outcome is the most threatening? Mortgage rates, especially for long-term borrowing, are closely linked to the US 10-Year Treasury yield. When Treasury yields rise, mortgage rates typically follow suit. That’s exactly what happened through the end of the first quarter, with rising yields pushing mortgage rates close to 7%. Some volatility in bond markets continues, adding uncertainty to rate trends.
The jobless numbers still are solid. The overall rate has risen by a couple of percentage points to 4.3% from 4.1% but this is well below the supposed average for unemployment (6.0%). Employment usually lags the economy, and right now, that is especially true. Many companies are very reluctant to fire people, as it has been so hard to find these workers in the first place. They do not want to struggle to hire when business improves, so they hang on to their workforce as long as they can.
Recent data indicate a slowdown in job creation, and the Fed has revised its prediction on unemployment to perhaps 4.6%. However, the Fed is paying close attention to the rise in the U-6 unemployment rate – a broader measure that includes discouraged workers and those working part-time involuntarily. That rate recently has climbed to 8.1%, a level that can signal weakening economic momentum. For comparison, the U-6 rate was 6.9% in 2019; this uptick is worrying, even though it remains below crisis levels.
The GDP numbers have been all over the place this year, whipsawed by all the tariff and trade controversy. The first-quarter numbers were miserable, and many people assumed a recession was right around the corner. That dip was caused by a flood of imports as businesses tried to beat the tariffs. By the second quarter, that impetus started to fade and numbers bounced back to more normal levels. Now numbers are robust in the third quarter. The latest GDPNow data shows the third-quarter GDP at 3.9%. Chances are, this number will decline by the time actual data is released, but the growth is real enough. Fully 54% of that growth has been attributed to consumer activity, and the majority of that consumer push has come from those in the upper third of income earners.
Commodity prices always seem to remain unpredictable and flexible as they respond to pressures from both demand and supply. The trade wars have impacted this supply chain, as many nations have used their commodity position as leverage. China has been restricting access to rare-earth materials such as germanium to force the US to relax some of the tariffs, and that strategy has been working very well. China now has lower tariffs than India and the EU. China continues to push to keep factories running at full capacity – not to meet global demand, but to sustain employment. This overproduction floods markets. The US dollar is not as weak as it has been, but it still is lower than in past years, which puts additional upward pressure on commodity prices.
Globally, manufacturers are monitoring inventory levels, which are relatively low for the first time in more than two years. While some firms have rushed to stockpile materials ahead of anticipated tariffs, these inventory surges have been irregular, making it difficult to forecast future trends. As new orders pick up in 2026, commodities will spike, driving prices higher. Weaker demand from China and parts of Europe may help offset some of that upward pressure.
There was a slight uptick in the recent industrial production numbers in the latest reading – a gain of 0.1% as compared to a decline of 0.4% in the prior month. Manufacturing output rose by 0.2% after a 0.1% decline in the previous month. Much of this gain stems from improved automotive production activity – a 2.6% increase. There has been an expectation of a slowdown in the automotive sector for months but the demand has not collapsed, and the production rate is back to 16 million annually. The mining data rose by 0.9% and utilities fell by 0.2%.
Overall, industrial production was at 103.9% of its 2017 average. Even capacity utilization numbers held steady at 77.4, about 2.2 points below its long-term average. By and large, the industrial and manufacturing sectors have been holding steady despite the tariff chaos and maybe because of it. There are many early orders in various sectors as a strategy to avoid the tariff hit.
Conclusion
The most persistent issue for manufacturing, construction, transportation and even services at this point is the chronic worker shortage. It is not that there are no people looking for work, as there still are some 9 million in that position. They lack the skills, education or background to take the jobs on offer. As pointed out before, by 2030, the entire Boomer generation will have reached retirement age, with many in manufacturing and construction expected to retire by age 65. Workforce participation is at its lowest since the 1970s, currently at 62.5%.
Chris Kuehl is managing director of Armada Corporate Intelligence. Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations.
More information: www.armada-intel.com