
We're In The Eye Of The Storm, As Tailwinds Become Headwinds
Last week was very much a US story. To be fair, these day's that's become the norm. But between friendship fallouts, and a number of slowing US indicators, there was plenty to digest.
We've seen a front loading of activity in anticipation of tariffs. And we may now be seeing the start of the unwind. Both of which cloud what's happening to the actual trend growth beneath. There has been a shock to sentiment, and conditions are deteriorating.
Our COTW takes a look at the slowdown in US output, but rise in inflationary pressure.
Here's our take on current events
We're officially one month away from the end of the 90-day pause on reciprocal tariffs. And so far, we've had one deal. One. It's with the UK, and it's with loose ends. We would have expected many more by now. And still hope for many more to come between now and July 9th. But if the current track record is anything to go by, it's painfully slow. We remain in limbo. And President Donald Trump's attention seems to be elsewhere, with his very public breakup with Elon Musk.
Beyond the playground drama, the US economy is starting to pay the price of the tariff turmoil environment. We've been waiting and watching, trying to gauge the tariff impacts. And it feels like we're in the eye of the storm.
We know, mostly anecdotally, that there has been a lot of front-loading. Car sales for example, surged in March, only to fall off a cliff in April. And we've seen a further pullback in Chinese sourced goods over the month of May.
The front loading of activity, and growth, is common sense. We saw similar reactions when GST was introduced. If you know a tax hike (GST or tariff) is coming, you buy now, not after. The inflation gauge spikes, temporarily, and then returns to levels seen before the tax hike. So, what we saw in the first half of the year, was a confused front loading. And what we'll see over the second half, is an unwind. In fact, we're possibly already seeing that unwind now.
Monthly trade data out of the US last week showed signs that the recent front loading of imports into the US may be coming to an end. The US trade deficit over April narrowed 55.5% - the most on record- led by a record 16.3% decline in imports. And the value of US imports from China fell to its lowest level since the early months of pandemic when borders were physically shut.
Nevertheless, as economists, it's difficult to strip out the likely front loading from the actual trend growth beneath. And it's equally difficult to strip out the unwind. So, growth may be rosy for now, and bleak a little later.
So, what do you do? Well, we turn to sentiment indicators. And there has been a shock to sentiment, as you'd expect given all the uncertainty.
Last week we saw a fall across US PMI surveys indicating a contraction in activity. See our COTW for more, but essentially the surveys can be summed up simply as firms are facing weaker activity but persistent inflation pressures. That's painful.
Everything that happens in an economy washes out in the labour market. If we're growing, businesses hire. If we're stalling, businesses retrench. The US payrolls report is the 'glamour stat'. The red carpet gets rolled out on the first Friday of every month, and camera crews fight for a glimpse into the labour market. Well last month's report was released on Friday, and the labour market is bending, not breaking. Payrolls have softened but not dramatically, with 139k for month of May (with consensus 120k). The unemployment rate was unchanged at 4.2%, while the level of underemployment held steady. That's good. And wages posted a solid gain of 3.9%. Again, that's good. But we're sitting here knowing it's still way too early to see the full impacts of the tariffs. And there are some questions around the strength of the payrolls report, with the ADP (a pre-payrolls payrolls report) declining noticeably this year, to just 37k last month. Conditions have weakened… but we're in the eye of the storm. We felt some tailwinds to start, with pre-loading, and face headwinds ahead, as the full force of the tariffs come through.
This week we get the US inflation report for May. We haven't seen impact of tariffs in the data yet. But we're watching. US surveys show higher, or elevated, inflation is expected, but it is not yet in the hard data.
Chart of the Week: US firms are feeling the heat.
Cracks in the US economy are starting to form. The recent flow of high-frequency data isn't looking too good. The ISM surveys for the month of May were especially disappointing. The manufacturing PMI fell from 48.7 to 48.5, the lowest in six months. And majority of its components also signalled contraction (a reading below 50). The new export orders fell 3pts, while production contracted for the third straight month and remains well below pre-covid levels. At the same time, the prices paid sub-index expanded for the fourth straight month, and the supplier deliveries sub-index rose 2pts suggesting a hoarding of inputs ahead of tariff escalation.
The services PMI posted a deeper slide in May. Economic activity in the sector contracted for the first time since June 2024, with the index plunging 1.7pts and slipping into contractionary territory. The drop in the headline index reflected a plunge in the new orders component, down 5.9pts. And the prices paid sub-index increased to the highest level in 30months.
Across both surveys, it's clear that output is beginning to slow, while inflationary pressures are heating up.

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


Otago Daily Times
an hour ago
- Otago Daily Times
US-China trade truce back on track, Trump says
A deal getting the fragile truce in the US-China trade war back on track is done, US President Donald Trump said, after negotiators from Washington and Beijing agreed on a framework covering tariff rates. The deal also removes Chinese export restrictions on rare earth minerals and allows Chinese students access to American universities. Trump took to his social media platform to offer some of the first details to emerge from two days of marathon talks held in London that had, in the words of US Commerce Secretary Howard Lutnick, put "meat on the bones" of an agreement reached last month in Geneva to ease bilateral retaliatory tariffs that had reached crushing triple-digit levels. "Our deal with China is done, subject to final approval with President Xi and me," Trump said on the Truth Social platform. "Full magnets, and any necessary rare earths, will be supplied, up front, by China. Likewise, we will provide to China what was agreed to, including Chinese students using our colleges and universities (which has always been good with me!). We are getting a total of 55% tariffs, China is getting 10%." A White House official said the 55% represents the sum of a baseline 10% "reciprocal" tariff Trump has imposed on goods imported from nearly all US trading partners; 20% on all Chinese imports because of punitive measures Trump has imposed on China, Mexico and Canada associated with his accusation that the three facilitate the flow of the opioid fentanyl into the US; and finally pre-existing 25% levies on imports from China that were put in place during Trump's first term in the White House. Lutnick said the 55% rate for Chinese imports is now fixed and unalterable. Asked on Wednesday on CNBC if the tariff levels on China would not change, he said: "You can definitely say that." Still, many specifics of the deal and details for how it would be implemented remain unclear. China's commerce ministry did not immediately reply to a request for comment and more information. Framework for a deal Officials from the two superpowers had gathered at a rushed meeting in London starting on Monday following a call last week between Trump and Chinese leader Xi Jinping that broke a standoff that had developed just weeks after a preliminary deal reached in Geneva that had defused their trade war. The Geneva deal had faltered over China's continued curbs on critical minerals exports, prompting the Trump administration to respond with export controls preventing shipments of semiconductor design software, aircraft and other goods to China. Lutnick said the agreement reached in London would remove restrictions on Chinese exports of rare earth minerals and magnets and some of the recent US export restrictions "in a balanced way," but did not provide details after the talks concluded . "We have reached a framework to implement the Geneva consensus and the call between the two presidents," Lutnick said, adding that both sides will now return to present the framework to their respective presidents for approvals. "And if that is approved, we will then implement the framework," he said. In a separate briefing, China's Vice Commerce Minister Li Chenggang also said a trade framework had been reached in principle that would be taken back to US and Chinese leaders. 'BACK TO SQUARE ONE' Trump's shifting tariff policies have roiled global markets, sparked congestion and confusion in major ports, and cost companies tens of billions of dollars in lost sales and higher costs. US stocks drifted lower on Wednesday but have recouped most of the losses suffered earlier in the spring during Trump's wave of tariff announcements. "It's a done deal, according to President Trump, but we haven't seen any details, which is why I think the market is not reacting to it yet. As with just about everything, the devil is in the details," said Oliver Pursche, senior vice president and adviser at Wealthspire Advisors in Westport, Connecticut. The World Bank on Tuesday slashed its global growth forecast for 2025 by four-tenths of a percentage point to 2.3%, saying higher tariffs and heightened uncertainty posed a "significant headwind" for nearly all economies. The US-China deal may keep the Geneva agreement from unravelling over duelling export controls, but does little to resolve deep differences over Trump's unilateral tariffs and longstanding US complaints about China's state-led, export-driven economic model. "If China will course correct by upholding its end of the initial trade agreement we outlined in Geneva - and I believe after our talks in London, they will - then the rebalancing of the world' largest economies is possible," Treasury Secretary Scott Bessent told members of Congress on Wednesday after returning from the London talks overnight. The two sides left Geneva with fundamentally different views of the terms of that agreement and needed to be more specific on required actions, said Josh Lipsky, senior director of the Atlantic Council's GeoEconomics Center in Washington. "They are back to square one, but that's much better than square zero," Lipsky added. It was not immediately clear from Trump's comments where things stood regarding the timeline for a more comprehensive deal that had been reached last month in Geneva. There, the two sides set August 10 as the deadline to negotiate a more comprehensive agreement to ease trade tensions, or tariff rates would snap back from about 30% to 145% on the US side and from 10% to 125% on the Chinese side. (Reporting by Doina Chiacu in Washington and Alistair Smout in London; Additional reporting by David Milliken and William James in London and Sachin Ravikumar; Ethan Wang, Shi Bu, Yuhan Lin and Alessandro Diviggiano in Beijing; Caroline Valetkevitch in New York; Writing by David Lawder, Kate Holton and Liz Lee; Editing by Lincoln Feast and Paul Simao)

RNZ News
an hour ago
- RNZ News
Trump administration reviewing Biden-era submarine pact with Australia, UK
By Phil Stewart, Idrees Ali and David Brunnstrom US President Donald Trump. Photo: AFP / Brendan Smialowski US President Donald Trump's administration has launched a formal review of a defence pact worth hundreds of billions of dollars that former president Joe Biden made with Australia and the United Kingdom, a US defence official has told Reuters. The pact allows Australia to acquire conventionally armed nuclear submarines. The formal Pentagon-led review is likely to alarm Australia, which sees the submarines as critical to its own defence as tensions grow over China's expansive military buildup. It could also throw a wrench in Britain's defence planning. AUKUS is at the centre of a planned expansion of its submarine fleet. "We are reviewing AUKUS as part of ensuring that this initiative of the previous administration is aligned with the President's America First agenda," the official said of the review, which was first reported by Financial Times . "Any changes to the administration's approach for AUKUS will be communicated through official channels, when appropriate." AUKUS, formed in 2021 to address shared worries about China's growing power, is designed to allow Australia to acquire nuclear-powered attack submarines and other advanced weapons such as hypersonic missiles. Vocal sceptics of the AUKUS deal among Trump's senior policy officials include Elbridge Colby, the Pentagon's top policy advisor. In a 2024 talk with Britain's Policy Exchange think-tank, Colby cautioned that US military submarines were a scarce, critical commodity, and that US industry could not produce enough of them to meet American demand. They would also be central to US military strategy in any confrontation with China centred in the First Island Chain, an area that runs from Japan through Taiwan, the Philippines and on to Borneo, enclosing China's coastal seas. The Virginia-class nuclear powered submarine USS Minnesota arrives at the US Naval Base Guam, on 26 November 2024. Photo: US Navy/ Justin Wolpert "My concern is why are we giving away this crown jewel asset when we most need it," Colby said. The Australian and UK embassies in Washington did not immediately respond to a request for comment. The US National Security Council also did not immediately respond to a request for comment. AUKUS is Australia's biggest-ever defence project, with Canberra committing to spend A$368 billion ($NZ396 billion) over three decades on the programme, which includes billions of dollars of investment in the US production base. News of the US review comes hours after the British government announced plans to invest billions of pounds to upgrade its submarine industrial base, including at BAE Systems in Barrow and Rolls-Royce Submarines in Derby, to allow the increase in submarine production rate announced in Britain's Strategic Defence Review. Britain said this month it would build up to 12 next-generation attack submarines of the model intended to be jointly developed by the UK, US and Australia under AUKUS. Only six countries operate nuclear submarines: the US, the UK, Russia, China, France and India. AUKUS would add Australia to that club starting in 2032 with the US sale of Virginia-class submarines. Before that, the US and Britain would start forward rotations of their submarines in 2027 out of an Australian naval base in Western Australia. Later, Britain and Australia would design and build a new class of submarines, with US assistance, with the first delivery to the UK in the late 2030s and to Australia in the early 2040s. Although Australia has declined to say ahead of time whether it would send the submarines to join US forces in any conflict between the US and China, Colby noted Australia's historic alliance with Washington, including sending troops to Vietnam. "I think we can make a decent bet that Australia would be there with us in the event of a conflict," Colby said last year. Speaking in Congress on Tuesday, Defence Secretary Pete Hegseth said "we're having honest conversations with our allies." On Australia, Hegseth said: "We want to make sure those capabilities are part of how they use them with their submarines, but also how they integrate with us as allies." Former Australian prime minister Malcolm Turnbull, who signed a previous agreement to acquire French submarines that was shelved in favour of AUKUS, told CNBC last week it was "more likely than not that Australia will not end up with any submarines at all, but instead, simply provide a large base in Western Australia for the American Navy and maintenance facilities there". -Reuters

RNZ News
2 hours ago
- RNZ News
US-China trade deal 'welcome relief' for Kiwi exporters
Todd McClay at the Mystery Creek Fieldays yesterday. Photo: Monique Steele Agriculture Minister Todd McClay who also has Trade portfolio has welcomed news of [ a possible US-China trade deal]. US President Donald Trump says a deal with China is "done" after two days of high-level talks in London. The overnight announcement comes as the government welcomes the state of the country's agriculture sector. The Ministry of Primary Industries' Situation and Outlook report is projecting a double digit increase in New Zealand export revenues this year - though it warns about global uncertainty. It estimates New Zealand's agricultural export revenue could reach just under $60 billion by the end of June, up from a dip in 2023-4. Agriculture and Trade Minister Todd McClay told Morning Report if a US-China deal has been done it would be "good news". At an OECD trade ministers meeting in Paris last week he had met with the trade ministers of both China and the US. Both had then gone off for joint talks so some momentum had been building to try and find a solution to their tariffs impasse. If things calmed down for international trade it would bring "welcome relief" for exporters and result in some "sensible decision-making". McClay said the remarkable growth in primary exports was very positive. Dairy had enjoyed a solid season with a good supply of grass which had increased milk production. The meat sector was performing well and for the first time $5 billion worth of kiwifruit had been exported. Even the US market faced with tariff uncertainty was providing some opportunities for Kiwi exporters, citing the example of NZ King Salmon which has talked of increased sales at a higher price. Kiwi exporters were working hard to add value to their products, McClay said. One example was selling ready to eat burger patties to China which resulted in greater returns for farmers. "So we're seeing Kiwi exporters go for value, not competing on price anywhere as much as they used to." Photo: RNZ / Richard Tindiller A government-backed grass certification standard for dairy and meat exports had been launched at Mystery Creek Fieldays yesterday, McClay said. This would be highly desirable for markets in China, other parts of Asia and the Middle East, McClay said. "Grass fed now is increasingly wanted by consumers and they're willing to pay more." On sustainable products, Groundswell has been calling for New Zealand to exit the Paris Agreement on Climate Change. McClay said that was not going to happen mainly because it would make exports to many markets untenable. He believed Groundswell and others were worried about higher costs and lower production if they adopted sustainable measures. "We've been really clear - we think through technology and other things we can meet these obligations without putting farmers out of business." Alternatives to farmers going into the Emissions Trading Scheme were being worked on and would be announced soon. McClay said the requirement of reducing methane by 10 percent by 2030 was on track to be met. "So it shows farmers are willing to do it but we have to lean heavily into technology rather than just planting trees." A number of products, known as methane inhibitors , have been developed already although they might have to overcome consumer resistance. McClay said anything developed would have to go through rigorous scientific testing. There would be a range of solutions developed and farmers would decide which ones they wanted to pick up. "The overseas customers through the dairy company should be paying for this, not the New Zealand farmer."