Juggling Dynamite

Last night at midnight, goods from more than 60 countries and the European Union became subject to tariff rates of 10% or higher. Products from the EU, Japan and South Korea are taxed at 15%, while imports from Taiwan, Vietnam and Bangladesh are taxed at 20%. See the full list of U.S tariffs in place around the world.

The White House says that the onset of tariffs provides economic clarity as companies understand the direction the U.S. is headed, allowing them to ramp up new investments and jump-start hiring in ways that can rebalance America as a manufacturing power. That is the hope.

But tariffs are taxes that the private sector pays, lowering profit margins and demand. The risk is that these sharply higher trade taxes will erode an already waning global economy.

Backward revisions show that hiring has been stalling for months, inflationary pressures rising for some goods, while key housing markets are swamped with new listings, few buyers and falling prices. No asset matters more to household balance sheets than home values; that’s why housing downturns have traditionally led the harshest economic contractions.

Risk markets have been trading on eternal optimism and record-high valuations for so long that believers have declared them independent of economic activity. Indefinitely? That would be a first.

I am old enough to remember the period from February to April 9, 2025, when Trump’s original 10% baseline tariff and mostly paused reciprocal tariffs were enough to spark a heart attack in financial markets. Today, the baseline tariff remains active, and reciprocal tariffs have resumed, with significant increases, especially a 35% tariff on many Canadian goods.

Risk-bulls have had a truly fantastic run, but no one gets market cycles all their way, or it wouldn’t be called a cycle.

At some point, some of this is going to matter, not just to struggling households and small businesses but also to the most expensive companies who have been funnelling precious cash into buying back their own grotesquely over-priced shares.

Perhaps some can afford to waste money, blow up equity and still keep going. For individuals later in life who have already amassed the bulk of their net savings, the math of loss tends to be devastating.

Canada’s seasonally adjusted job vacancy rate fell to 2.7% in May, down 10 basis points (bps) from April and -50 bps year over year, reaching an 8-year low, significantly below pre-pandemic levels (red shown below since 2015, courtesy of BMO and Better Dwelling.com, with the US job opening rate in blue).
Official unemployment rates are lagging indicators, but they have increased significantly from cycle lows in both Canada and America, and, if not for immigration outflows in both countries, would be higher at this point in the cycle.

The good news is that weakening labour markets reduce demand and overall inflationary pressures, opening room for monetary easing. Market expectations for rate cuts have risen sharply on the latest labour data weakness. Government bond prices have risen (yields have fallen) in agreement.

The bad news is that, as with monetary tightening, easing takes quarters to move through the economy, and job losses typically rise throughout.

At some point in every cycle, slumping demand undermines overzealous sentiment and highly leveraged asset prices.

Rosenberg Research conducted a deep dive into the latest employment data in this morning’s note, pointing out that for those of us paying attention, last week’s negative employment revisions were consistent with many other real-time readings year-to-date.

The ever-complacent risk-on investment community may be interested to know that over the past six decades, the type of collapse in the pace of job creation to stall-speed we just endured over the last three months foreshadowed an imminent recession with 100% accuracy. Word to the wise.

As the US and Canadian central banks declined to offer monetary easing yesterday, consumer confidence measures are already below the levels recorded in the past nine recessions, including the periods surrounding 9/11, the 2008 financial crisis, and the 2020 pandemic.

A raft of recent data shows households under increasing financial stress across all income levels.

Year-to-date consumer spending data, combined with rising debt delinquencies, suggest the post-pandemic model of economic growth fueled by upper-income purchases of big-ticket items like cars, houses and vacations is coming under strain. See: Even top income earners are falling behind on credit card and car payments.

Spending in the first quarter was the weakest since the onset of the pandemic, and more recent monthly numbers indicated ongoing caution in discretionary categories like recreation services, air transportation and accommodations — all of which have registered outright declines this year.

Gucci owner Kering reported yesterday that Gucci sales were 25% lower year on year.

Procter & Gamble, a long-recognized bellwether for the health of the U.S. consumer economy, says consumers are delaying purchases and shopping less frequently. See, American shoppers are slowing down.

Delinquencies on credit card and auto loan debts from those making at least $150,000 annually have jumped almost 20% over the last two years, and faster than for middle- and lower-income borrowers (VantageScore data).

A recent Federal Reserve Bank of St. Louis study found the share of people making late card payments in the highest-income zip codes has risen twice as much over the last year as in the lowest-income ones.

Fifty-eight percent of Americans surveyed expect higher unemployment in the next twelve months, the highest since 2008, and a level only seen during past recessions. Those looking for incomes over 100k annually are reporting the least optimism on new job prospects since the pandemic (chart below since 2013).

Last year, a record of nearly 5.0% of workers in 401(k) plans took a hardship distribution for financial emergencies, up from a pre-pandemic average of about 2.0% (Vanguard Group data).

About 40% of the working population isn’t saving enough to maintain their lifestyle in retirement. The current personal savings rate of 4.5% in America 5.7% in Canada needs to rise significantly, and that means less per capita consumption spending in developed economies that have become dependent on it for the bulk of economic growth.