Muted May Inflation Defies Tariff Fears Consumer prices rose 2.4% over the year, with a lower than expected month-over-month increase

Consumer prices rose 0.1% in May over the previous month, less than economists anticipated. Year-over-year inflation was 2.4%, in line with expectations and near a four-year low recorded in April. (…)

The report will raise questions over when a widely anticipated bump in prices this summer, expected by the Federal Reserve and private-sector economists, will materialize—and whether it will be as stiff as some have warned.

Among the possible explanations: Demand isn’t strong enough for businesses to push along price increases to customers, leading tariffs to be less inflationary than expected. Another theory is that because businesses loaded up on inventories ahead of anticipated tariff increases, that allows them to wait until later in the year to test the ability of consumers to accept higher prices. (…)

Prices did rise for some items exposed to tariffs, including appliances, car parts and audio equipment. (…)

Many goods whose prices factor into the Labor Department’s calculations are sampled only every other month. (…)

John Authers:

The details reveal that the report was not quite as good as it looked. The Atlanta Fed divides inflation into products with flexible prices, and those that are “sticky” — where price changes take a while to execute and cuts are rare. Over the last three months, flexible prices dipped, possibly due to weak demand, while sticky price inflation declined very slowly.

The Cleveland Fed’s measure of the trimmed mean, which excludes outliers and averages the rest, ticked upward for the first time this year, and remains above 3% — another sign that underlying inflation pressures remain:

Also problematic for the Fed is an uptick in “supercore” inflation — services excluding shelter — that it has made a priority. Goods’ contribution to CPI, still tiny in aggregate, is rising steadily, even if there hasn’t been the step change that might be expected with new tariffs:

Ed Yardeni:

May’s headline and core CPI inflation rates remained subdued at 2.4% y/y and 2.8% y/y (chart). Prices-paid and prices-received indexes, based on national and regional purchasing managers surveys, have been rising in recent months, reflecting the inflationary consequences of Trump’s tariffs. However, these inflationary pressures have yet to show up in the CPI. They were expected to do so by now. It is possible that they might still do so during the summer months. But so far, they are also no-shows.

Interestingly, both the headline and core CPI inflation rates excluding shelter have been hovering at or just below 2.0% for the past year

Goldman Sachs:

Based on the details in the CPI report, we estimate that the core PCE price index rose 0.18% in May (vs. our expectation of 0.23% prior to today’s CPI report), corresponding to a year-over-year rate of +2.62%.

Additionally, we expect that the headline PCE price index increased 0.14% in May, or increased 2.29% from a year earlier. We estimate that market-based core PCE rose 0.22% in May.

US Tariff Revenue Hits Fresh Record, Helping Shrink May Deficit

The Treasury Department recorded $23 billion in customs-duties revenue for May, according the agency’s monthly budget statement. This represents a $17 billion, or 270%, increase from the same month a year earlier. May’s figure is more than triple the monthly average of 2024. (…) The jump in customs duties revenue reflects several new tariffs put in place by President Donald Trump, the bulk of which took effect in early April. The highest levies on China were reduced temporarily in mid-May, when the US and China reached a preliminary deal. This week, US-China talks yielded a framework for an agreement, though Chinese President Xi Jinping still has to sign off on it.

These costs will find their way either in prices or in margins.

World Bank Sees U.S. Growth Rate Halving as Tariffs Slow Global Economy Slowdown in U.S. and global economies could be more severe if tariffs rise from levels in effect in May, bank says

The Washington, D.C.-based development bank said it expects the world’s largest economy to grow by just 1.4% in 2025, a sharp deceleration from the 2.8% expansion recorded in 2024. In its January report on the outlook for the global economy, the World Bank forecast a 2.3% increase in U.S. gross domestic product.

The World Bank also lowered its forecasts for economic growth in the eurozone, Japan, India and many other countries around the globe, as the rise in duties crimps their exports to the U.S. Among large economies. Mexico is set to suffer the biggest blow, with growth in 2025 now forecast at just 0.2%, down from 1.5% in January.

The World Bank now expects world output to grow by 2.3% this year and 2.4% the next, having previously projected an expansion of 2.7% in each year. (…)

The World Bank warned that the slowdown in both the U.S. and global economies could be more severe if tariffs were increased further from the levels that prevailed in late May, as might occur if the increases announced on April 2—and then paused for 90 days to allow for negotiations—were to come into force in July.

Should duties on imports rise by a further 10 percentage points, global economic growth would be just 1.8% this year and 2% in 2026, the World Bank’s economists estimated.

“This sudden escalation in trade barriers results in global trade seizing up in the second half of this year and is accompanied by a widespread collapse in confidence, surging uncertainty, and turmoil in financial markets,” the World Bank said of such a scenario.

The World Bank’s forecasts are the latest warning from an international body about the perils of Trump’s trade policy. The Organization for Economic Cooperation and Development last week said U.S. economic growth could slow to 1.6% this year, with inflation nearing 4% as a result of higher tariffs. The White House has said the OECD’s report was among “a growing list of doomsday prognostications that are untethered to reality.”

However, the World Bank backed Trump’s claim that the U.S. faced higher tariffs on its exports than it levied on imports before the recent increases, and Gill said other countries should offer to lower their duties in an effort to secure trade peace.

“This favorable access to U.S. markets was not a sustainable policy,” he said. “The differences should be reduced quickly and this can only happen if everyone acts in good faith.”

Indeed, in a scenario where tariffs were halved compared with their levels in late May, economic growth would be slightly higher both this year and next, the World Bank said. (…)

The development bank left its forecasts for China unchanged, as it expects that weaker exports to the U.S. will be offset by greater support from government spending. India’s economy is expected to continue to grow rapidly, although at a slightly slower pace than previously forecast.

A number of developing economies that weren’t growing rapidly will also see weaker expansions than had been expected, including South Africa. Many are exporters of commodities, prices for which have fallen sharply since Trump’s tariff increases led to lower expectations for global demand. While slowdowns are expected to be widespread, outright contractions are likely to be rare, with Iran seen as one notable exception.

The World Bank said this latest setback would extend a long period of lower growth for developing economies.

“Outside of Asia, you’re not seeing improved living standards,” Gill said. “The developing world is becoming a development-free zone.”

Trump Says Again He’ll Set Unilateral Tariffs in Two Weeks

President Donald Trump said he intended to send letters to trading partners in the next one to two weeks setting unilateral tariff rates, ahead of a July 9 deadline to reimpose higher duties on dozens of economies. (…)

It’s unclear if Trump will follow through with his pledge. The president has often set two-week deadlines for actions, only for them to come later or not at all. The president on May 16 said he would be setting tariff rates for US trading partners “over the next two to three weeks.”

Trump in April announced higher tariffs on dozens of trading partners only to pause them for 90 days as markets swooned and investors feared the levies would spark a global downturn. Yet despite the ongoing negotiations, the only trade framework the US has reached is with the UK, along with a tariff truce with China. (…)

Commerce Secretary Howard Lutnick said earlier Wednesday that the European Union is likely to be among the last deals that the US completed, expressing frustration with conducting talks with a 27-nation bloc.

Trump Has No China Trade Strategy Washington and Beijing stage a tactical retreat that shows China’s leverage.

The WSJ Editorial Board:

President Trump on Wednesday hailed the result of the latest trade talks with China as a great victory, but the best we can say is that it’s a truce that tilts in China’s direction.

Details are few, but the countries appear to be resetting their trade relationship to where it was a few months ago before a tit-for-tat escalation. Mr. Trump had agreed to reduce tariffs on China to 30% (55% including those he imposed during his first term) from 145% while China dropped its tariffs on U.S. goods to 10% from 125%.

Beijing will ease its restrictions on rare-earth minerals and magnets for six months while the U.S. will relax its restrictions on the sale of jet engines and ethane to China. The U.S. will keep its export controls on advanced chips, which are a hindrance to Mr. Xi’s AI ambitions though some developers like DeepSeek are using work-arounds.

The Administration also agreed to rescind restrictions on Chinese student visas so the children of Communist Party officials can study at U.S. universities. (…)

U.S. manufacturers will no doubt welcome the rare-earth mineral reprieve, but China is keeping the gun on the bargaining table by putting a six-month limit on export licenses. That means if trade tensions flare again, Mr. Xi can resort to the same threat.

China first weaponized its dominance in rare-earth minerals in a conflict with Japan in 2010 involving the Senkaku Islands, but the U.S. and its allies were slow to develop alternatives. Will they now get the message?

Developing an alternative supply will take years and require cooperation with allies because the U.S. can’t produce and process all the rare earths it needs. Japan has pitched a rare-earths alliance as part of tariff negotiations, and the Administration would be wise to expand such a partnership with other allies.

This gets to the larger problem with Mr. Trump’s tariff strategy—that is, he doesn’t have one. His latest walk-back shows he can’t bully China as he tried to do in his first term. China has leverage of its own.

A smarter trade strategy would be to work with allies as a united front to counter China’s predatory trade practices. Instead, Mr. Trump has used tariffs as an economic scatter-gun against friends as well as foes. This increases China’s leverage, and, like this week’s trade truce, that’s nothing to cheer about.

Supply Chains Become New Battleground in the Global Trade War U.S.-China talks on trade resemble arms-control negotiations, with export controls the key weapons in each side’s arsenal

(…) Today, instead of warheads, the U.S. and China are wielding a range of new economic weapons that have the potential to cause widespread economic pain. Following the latest skirmish, China agreed to resume exports of rare-earth magnets and critical minerals needed by U.S. companies—but only for six months, The Wall Street Journal reported. (…)

In many essential sectors of the modern economy, China has the upper hand. The world’s second-largest economy accounts for around a third of global manufacturing output, giving it a potential chokehold on auto parts, basic ingredients for drugs, key parts of the electronics supply chain and a host of other industrial sectors. It is the world’s No. 1 exporter of machinery, ships, steel, ceramics, textiles and dozens of other goods, according to data from the International Trade Center, a U.N.-backed agency that promotes open trade.

The U.S. dominates fewer sectors—but its clout in advanced technology gives it an outsize advantage. (…)

Under the Biden administration, the U.S., which for years made abundant use of its dominant position in global finance to impose sanctions on countries including Iran and Russia, wielded one of the most powerful economic tools America possesses: its tech prowess. Washington tightened controls on exports of high-end semiconductors to China, and persuaded allies including Japan and the Netherlands to limit supplies to China of lithography machines and other essential chip-making tools. The goal was to thwart China’s ambition to supplant the U.S. as the world’s foremost technological power.

In response, China has begun flexing its own economic muscle by tightly controlling the export of rare earths and other critical minerals that are essential for the manufacture of car engines, chips, smartphones and a host of other advanced technologies. It upped the ante this year by extending those controls to the export of rare-earth magnets, indispensable components in everything from air-conditioning units to jet fighters.

The U.S. said China agreed to speed approvals of magnet exports as part of a trade truce agreed in Geneva in May, which lowered substantially tariffs imposed by both countries on the other’s imports.

Yet Washington soon grew frustrated at the slow pace of approvals, which automakers complained was hurting production. Officials again reached for export controls to raise the pressure on Beijing, notifying companies that exports to China of jet engines and related parts, chip-making software, and ethane, a component of natural gas used in manufacturing plastics, were suspended, The Wall Street Journal reported. (…)

President Trump in a post on his Truth Social network said Wednesday that a deal is done and that the supply of magnets and rare earths from China to the U.S. economy will resume.

But China’s move to put a six-month limit on rare-earth export licenses for American manufacturers signals that Beijing could use this weapon against the U.S. if trade tensions erupt again.

The potential for export controls to disrupt trade adds to the pressure on companies already struggling to navigate tariffs and mushrooming trade conflicts. Companies operating in the U.S. and China will increasingly need to split their supply chains into two, said Eric Zheng, president of the American Chamber of Commerce in Shanghai.

“Companies will, generally speaking, continue to derisk, however you define this, essentially by treating the U.S. and China as two separate markets,” he said.

The US advantage on tech has diminished in recent years as Chinese entrepreneurs accelerated developments and found work-arounds, often less costly (e.g. DeepSeek).

The Netherlands was persuaded during the Biden administration to limit the supply to China of crucial lithography machines used in advanced chip making.

ASML is the world’s sole supplier of extreme ultraviolet (EUV) lithography machines, essential for manufacturing the most advanced semiconductor chips. This unique position gives the Netherlands a critical role in the global semiconductor supply chain. ASML’s presence has fostered a robust high-tech ecosystem in the Netherlands, supporting numerous suppliers, research institutions, and spin-off companies.

ASML is considered the “corporate jewel” of the Netherlands and Europe’s most valuable technology company, with a market capitalization exceeding €275 billion.

Actually, ASML is a linchpin of the Dutch national economy, a driver of innovation, a major employer, and a strategic asset with global influence. Its continued presence and growth are vital to the Netherlands’ economic prosperity, technological leadership, and geopolitical standing.

But the US-China standoff is significantly impeding ASML’s, and the Netherlands’, growth and profitability. How long will the Dutch government accept to pay the huge price of preventing ASML to sell to the world’s largest market because the US is asking?

Importantly, ASML plays a crucial role in Europe’s technology ecosystem. Barring ASML from China is effectively impeding the EU’s technological development.

The recent sequence of events is quite interesting:

Last January, Chinese Vice Premier Ding Xuexiang met with Dutch PM Dick Schoof. From various accounts:

• Dutch Prime Minister Dick Schoof said: “We are in talks, good talks and we are also watching out very specifically for the economic interests of ASML, those need to be weighed against other risks and the economic interests are extremely important. “ASML is for the Netherlands an extremely important, innovative industry that should not suffer under any circumstances, because that would damage ASML’s global position,” he added.
• “China is an extremely important trade partner, particularly for the Netherlands” Schoof said.
• Schoof said the Dutch government did not expect a change in policy from U.S. President Donald Trump on semiconductor equipment exports – and that the Netherlands decides its own export policies – but that the two countries remain close allies.
• Ding encouraged the Netherlands to play a constructive role in promoting China-EU ties.
• Both countries emphasized the importance of openness and mutual trust. This could translate into increased trade opportunities, with Dutch businesses exploring the Chinese market and China fostering partnerships in the Netherlands.
• The shared commitment to safeguarding free trade and ensuring stable global supply chains indicates further collaboration to mitigate trade disruptions and enhance economic resilience, particularly in the face of growing geopolitical tensions.

The Chinese envoy extensively used the word “trust” in his conversations and statements.

Now, the recent collapse of the Dutch government and the upcoming snap election on October 29, 2025, have injected significant uncertainty into the country’s political and economic landscape. With the far-right Party for Freedom (PVV), the Labour-Green Left alliance (PvdA-GL), and the liberal VVD all polling closely, the direction of future policy—especially on issues crucial to ASML—remains unclear.

Some Dutch parliamentarians have voiced concerns about national sovereignty and the risk of the Netherlands being caught between U.S. and Chinese interests. There is ongoing debate about how much Dutch policy should be influenced by U.S. geopolitical goals, especially as the U.S. has previously imposed unilateral restrictions on ASML’s exports.

The Dutch cabinet has expressed worries about ASML becoming a “weapon” in the U.S.-China trade war, and ministers have discussed possible scenarios if U.S. pressure increases. These discussions reflect anxiety about the Netherlands’ ability to maintain independent policy choices amid global tensions.

Christophe Fouquet, ASML CEO, has become more open about his concerns that government policies risk upending decades-old supply chains, slowing development of artificial intelligence and other technologies and motivating China to expand its homegrown semiconductor industry, which could ultimately undercut ASML’s dominance and harm Western interests.

While China has a way to go before matching ASML’s technology, he said, “the people you try to stop will work harder to be successful.” “It doesn’t matter how many obstacles you put in the way,” he added.

He said the European Union and the Netherlands could do more to protect ASML and the semiconductor industry from being caught in the crossfire of US-Chinese fights.

Nvidia’s CEO Jensen Huang recently said “Shielding Chinese chipmakers from US competition only strengthens them abroad and weakens America’s position.”

Interestingly, last March,

The Netherlands’ parliament approved a series of motions calling on the government to reduce dependence on U.S. software companies, including by creating a cloud services platform under Dutch control. While such initiatives have foundered in the past due to a lack of viable European alternatives, lawmakers said changing relations with the United States under the presidency of Donald Trump have given the issue fresh urgency.

“The question we as Europeans must ask ourselves is: do we feel comfortable with people like Trump, Zuckerberg and Musk ruling over our data?” said Marieke Koekkoek of the pro-European Volt party, who authored one of the eight motions, in an email to Reuters.

In addition to launching a sovereign cloud services platform, the motions called on the government to re-examine a decision to use Amazon’s web services for the Netherlands’ internet domain hosting, and to develop alternatives to U.S. software and preferential treatment for European firms in public tenders.

The Dutch vote came a day after dozens of European tech firms called on the European Commission to create a sovereign fund to invest in European technology, including cloud infrastructure, and a “Buy European” mandate.

Bert Hubert, a Dutch technology expert who has advocated for reducing dependency on the U.S., said: “This is only the first step in potentially doing something.”

But he said one important outcome would be forcing agencies to publicly report on risks related to their reliance on U.S. cloud firms.

“With the advent of Trump 2.0, it has become clear that this is not something you can harmlessly sign off on,” he said.

No wonder China is using the word “trust” as often as it can.

You can bet that the Trump administration will closely monitor the upcoming Dutch elections.

What’s at Stake If Trump Scraps Security Pact With UK, Australia

The Trump administration has launched a review into the Aukus defense pact that the US signed with Australia and the UK in 2021 to counter China’s military expansion in the Indo-Pacific region.

Central to the agreement is a controversial project — expected to cost hundreds of billions of dollars — to help Australia develop a fleet of nuclear-powered submarines over a 30-year period.

If the US ends up abandoning the pact, it would deal a major blow to Australia and its defense capabilities. It would also raise questions for other Asia-Pacific allies about the US commitment to their security interests in the face of a rising China. (…)

Trump Plan to Kill Dozens of NASA Missions Threatens US Space Supremacy The White House’s spending plans would further the space agency’s evolution toward becoming an incubator for private industry

(…) The White House is calling for a roughly 50% cut to NASA’s science spending to $3.9 billion, part of an overall pullback that would deliver the lowest funding level in the agency’s history and kill more more than 40 NASA science missions and projects, according to detailed plans released last month. The Trump administration has also left the agency without a permanent leader and without a vision for how America’s civilian space policy is going to work with US allies and compete with China and other rivals. (…)

Researchers worry that abandoning missions would mean investments made by earlier generations might be lost or forgotten.

“Once you launch and you’re operating, then all those costs are behind you, and it’s relatively inexpensive to just keep the missions going,” said Amanda Hendrix, the chief executive officer of the Planetary Science Institute, a nonprofit research organization. “So I’m very concerned about these operating missions that are still producing excellent and really important science data.” (…)

“This is a NASA that would be primarily human spaceflight focused,” Casey Dreier, chief of space policy for The Planetary Society, a nonprofit that advocates for space science and exploration, said of the proposed changes. “This is a NASA that would say, ‘The universe is primarily the moon and Mars,’ and basically step away from everything else.”

There are signs that the administration’s proposed cutbacks won’t satisfy lawmakers who view space as vital to US interests. Senator Ted Cruz, the Texas Republican who leads a committee that oversees NASA, has proposed legislation that would would provide nearly $10 billion to the agency.

“American dominance in space is a national security imperative,” Cruz said in a statement to Bloomberg. “The Commerce Committee’s bill carefully invests in beating China to the Moon and Mars — while respecting every taxpayer dollar. It’s rocket fuel for the commercial space companies and NASA that are working to keep America ahead of China in the Space Race.” (…)

During Trump’s presidency, NASA’s transformation into an incubator for private industry is likely to gain speed. Throughout its budget proposal, the White House calls for mimicking past programs that have leaned more on outsourcing to the private sector. (…)

Pulling back is likely to have consequences. Trump’s broader push to curtail funding for science — the administration has choked off money for medical, climate and other research — risks eroding an important source of American soft power.

After the end of the Cold War-era space race, NASA became a vessel for international cooperation, proving countries with lofty goals can work together. Many of the NASA missions Trump has proposed canceling or pulling away from entailed collaboration with European allies. (…)

US Moves Some Diplomats Out of Mideast as Iran Tensions Rise

The US ordered some staff to leave its embassy in Baghdad, officials said, after Iran threatened to strike American assets in the Middle East in the event it’s attacked over its nuclear program.

The decision to reduce staffing in Iraq was “based on our latest analysis,” according to the US State Department. Defense Secretary Pete Hegseth authorized family members of US military stationed across the region to leave, according to a Pentagon statement.

The State Department also said US government employees and family members in Israel are restricted from traveling outside major cities such as Tel Aviv and Jerusalem until further notice.

None of the statements cited a specific threat. But they came after the New York Post published an interview with President Donald Trump in which he said he was less confident the US will reach a deal with Iran. The countries are negotiating an agreement that would curb the Islamic Republic’s nuclear activities in return for sanctions relief.

Trump has consistently said he wants an agreement with Iran and to avoid a war, but that the US could resort to military action if Tehran doesn’t accept a deal.

“I sincerely hope it won’t come to that and that the talks reach a resolution,” Iran’s Defense Minister Aziz Nasirzadeh said on Wednesday. “But if they don’t, and conflict is imposed on us, the other side will undoubtedly suffer greater losses.”

Iran announced the start of military drills on Thursday, “with a focus on enemy movements.” The head of its Islamic Revolutionary Guard Corps said the force was “ready for any scenario.”

The same day, the Islamic Republic said it would establish a new uranium-enrichment center in response to a decision by the United Nations atomic watchdog to censure it. (…)

US officials have been told that Israel is ready to launch an operation into Iran, which is part of the reason why the Trump administration advised some Americans to leave the region, CBS News reported on Wednesday evening, citing multiple sources it did not name.

Israel is wary Tehran can be trusted to adhere to any diplomatic accord with Washington and says it reserves the right to attack the Islamic Republic, with or without US help. (…)

While the US and Iran have broadly said all five rounds of talks in the past two months have been positive, a key sticking point is whether Tehran is allowed to continue processing uranium, albeit to a low level. Iran says it won’t end its enrichment. The US has given conflicting comments, though in recent weeks Trump has more firmly stated that Tehran must stop its enrichment altogether.

Trump open to dialogue with North Korea’s Kim Jong Un, White House says Remarks come after report said North Korean officials refused to accept letter from Trump to Kim.

Remembering Brian Wilson, a Surfer of Sound The leader of the Beach Boys, who has died at age 82, made a profound impact on music and American culture through his experimental production, captivating harmonies and timeless celebration of teenage life.

Though his most creative period lasted roughly six years in the 1960s, Brian Wilson, whose death at age 82 was announced today, left a profound impact on pop music, record production and American culture. In an ascent that ran from 1962 to 1967, the songwriter, bassist, arranger, falsetto singer and original Beach Boys leader pioneered vocal harmony, studio experimentation and songs that fed teens’ dreams of an endless summer. (…)

Over the course of Mr. Wilson’s seven-decade career, he won two Grammys (in 2005 and 2013) and received a Grammy Lifetime Achievement Award in 2001 as a member of the Beach Boys. The band’s first Top 10 Billboard pop hit, “Surfin’ U.S.A.,” reached No. 3 in 1963. In all, they had four No. 1 Hot 100 entries, 15 in the Top 10 and over 50 that charted. (…)

America’s Small Businesses Hopeful of Boost From Trump’s Spending Bill The prospect of tax breaks has helped to lift the mood

The National Federation of Independent Business said Tuesday that its optimism index, a gauge of sentiment among small firms, rose to 98.8 in May from 95.8 a month earlier, taking the index back above its long-term average, represented by a reading of 98. The increase ends a four-month streak of worsening sentiment, as an initial post-election burst of confidence began to burst amid a whipsawing trade policy and concerns over inflation and a shrinking labor force.

“Although optimism recovered slightly in May, uncertainty is still high among small-business owners,” NFIB economist Bill Dunkelberg said. Still, the survey showed a leap in good feeling about firms’ prospects ahead. Nearly a quarter of responding firms plan to invest in capital outlay in the next six months, the highest reading this year and a sign that owners are increasingly confident.

The cheerier mood comes as Trump’s “big, beautiful bill,” which would offer new cash for defense, border security and agriculture and entails a big increase in the budget deficit, makes its way into the Senate, having narrowly been passed in the lower house. The bill also includes tax breaks for businesses; taxes are now small businesses’ primary concern, above inflation and labor costs, NFIB’s survey showed. But competing demands among Republican senators could stymie the bill’s passage into law. (…)

Wells Fargo notes that

There also appears to be a disconnect between current conditions on the ground and the economic outlook. Small firms’ expectations for business conditions and sales meaningfully strengthened in May while reports of actual sales, earnings and capital expenditures each deteriorated. The uncertainty index also climbed two points to 94, well above the historical average of 68.

Hiring plans also sank one point to 12% and the share of firms with job openings remained unchanged at the lowest reading since January 2021. Price and compensation pressures remain contained at present amid a directional deterioration in the labor market. However, an uptick in plans to raise prices possibly points to higher inflation readings this summer. Only 26% of firms on net reported raising compensation over the past three months, the lowest share since February 2021.

Taxes took the top spot as small firms’ most important problem in May. This issue will likely remain top of mind for small firms over the next couple of months as Congress irons out the details of its tax & spending bill.

 

Source: NFIB and Wells Fargo Economics

U.S. and China Agree to Get Geneva Pact Back on Track Move marks the latest twist in countries’ winding trade war

Representatives from the countries said the framework would essentially restore a pact they agreed to in Switzerland last month, a deal that saw both sides lower tariffs and was premised in part on Beijing’s promise to speed up critical mineral-export licenses while the negotiators kept talking.

“The two largest economies in the world have reached a handshake for a framework,” Commerce Secretary Howard Lutnick said. “We’re going to start to implement that framework upon the approval of President Trump, and the Chinese will get their President Xi’s approval, and that’s the process.”

A senior Chinese negotiator, Li Chenggang, nodded to Lutnick’s remarks, saying the two sides “agreed in principle.” (…)

The negotiators didn’t disclose exactly what they had agreed to as part of the framework, which could lead to continued uncertainty over the trade truce. And the lack of announced details might suggest the U.S. side will need Trump’s approval to undo some of the controls Beijing’s representatives asked for [loosen restrictions significantly on the sale of technology and other products to China]. (…)

“You should expect those to come off, sort of, as President Trump said, in a balanced way, when they approve” the rare-earth licenses, Lutnick said. “Then you should expect that our export implementation will come down,” he said. (…)

A recent commentary by the official Xinhua News Agency criticized the U.S. for allegedly viewing economic issues through the lens of security, saying, “This thinking will become the biggest obstacle” to cooperation between the two countries. Yet it also left the door open for relations to improve, saying strengthening economic ties will benefit both nations. (…)

“What’s become clear in the last few weeks is that this rare-earths issue has got real leverage for Beijing.” After raising tariffs on China to above 100%, Trump agreed to lower them as exporters and consumers felt the pain. (…)

Now, with a shortage of rare earths threatening automakers’ ability to keep production lines running, the U.S. has had to come back to the table—as China stresses that it was Washington that asked for the talks. (…)

Appeals Court Keeps Trump’s Sweeping Tariffs in Place for Now

The U.S. Court of Appeals for the Federal Circuit extended its earlier temporary pause of a trade court decision that found Trump exceeded his powers in imposing the tariffs.

The appeals court said it intends to hear arguments on July 31, which means the tariffs likely will remain in effect for at least the next two months.

All of the court’s active judges will participate in the case. The losing party is expected to seek review at the Supreme Court. (…)

“It’s important to note that every court to rule on the merits so far has found these tariffs unlawful, and we have faith that this court will likewise see what is plain as day: that IEEPA does not allow the president to impose whatever tax he wants whenever he wants,” he said in a statement.

The plaintiffs had warned the appeals court that allowing the tariffs to stay in effect while their case proceeds would be a death blow for some companies, even if they ultimately prevailed in court and were refunded the levies. (…)

The trade court’s May ruling, by a unanimous three-judge panel, found that Congress, which typically holds responsibility over tariffs, hadn’t given Trump the unilateral authority he claimed under IEEPA. And it said lawmakers couldn’t have delegated unbounded tariff authority to the president even if they wanted to.

The Justice Department argued that the trade court had wrongfully upended Trump’s efforts to correct the trade deficit and put the U.S. on equal footing in the global economy.

“The injunction threatens to unwind months of foreign-policy decision-making and sensitive diplomatic negotiations, at the expense of the nation’s economic well-being and national security,” the department said in its stay request to the Federal Circuit.

Tuesday’s order avoided offering any preview of the appeals court’s ultimate views. “Both sides have made substantial arguments on the merits,” the court said.

While on tariffs, Goldman Sachs notes that Japan export prices, which are closely watched in relation to tariffs, fell -0.7% MoM in yen terms in May,

continuing the decline since February, partly reflecting yen appreciation. Export prices also fell -0.9% mom in contract currency terms in May (April: -0.3%), which directly affects local sales prices in export destinations.

Export prices in contract currency terms have been declining since April, with a particularly notable decline for passenger cars exported to North America (-12.0% in May; -6.5% in April).

A 25% tariff has been imposed on US auto imports from Japan since April, and it is possible that Japanese exporters have started to lower export prices from Japan to mitigate the impact of the tariff on local selling prices.

Not great for margins.

• Chinese exporters pivot to domestic consumers in trade war hedge

The recent 90-day truce in the U.S.-China tariff war has prompted a flurry of activity among Chinese exporters, with traders rushing to ship goods overseas before tensions escalate again. But at the same time a major shift is underway among exporters — many are now trying to sell those same goods at home, as they scramble to hedge their bets against future global instability.

In April, as Beijing and Washington went to toe-to-toe with tariffs, foreign trade manufacturers turned to domestic consumers, launching high-profile “export-to-domestic sales” exhibitions and campaigns in supermarkets, department stores and shopping malls. Manufacturing areas held investment promotion conferences and e-commerce platforms tilted traffic toward “repatriated” foreign trade products.

GM Plans $4 Billion Investment to Boost U.S. Manufacturing The move gives the company the ability to assemble more than two million vehicles a year in the U.S., GM said

(…) The move could help America’s largest automaker defray up to $5 billion in annual costs from tariffs imposed by President Trump. The company manufactures nearly half of the vehicles it sells in the U.S. in foreign assembly plants. (…)

The announcement also marks the latest pullback on EVs from a company that once set an ambitious agenda for a transition to battery-powered vehicles. GM said its EV business is growing in the U.S. 

The company said it is moving the gasoline-powered version of its Chevrolet Blazer SUV from a factory in Mexico to one in Springhill, Tenn. A battery-powered Blazer will continue to be produced in Mexico.

A factory in Orion Township, Mich., where GM originally planned to make battery-powered pickups, will now manufacture gas-powered trucks and SUVs instead. The electric trucks that were bound for Orion will be made at an existing dedicated EV plant near Detroit. (…)

Last month, GM dropped plans to invest $300 million in electric-vehicle motor production at its Tonawanda Plant near Buffalo, and will instead invest $888 million to produce V-8 engines at the facility.

GM said its capital expenditures could reach $12 billion annually in 2026 and 2027, up from a maximum of $11 billion this year, as it works to boost its U.S. production. (…)

Question: availability of a skilled and trained labor force that will work for competitive wages vs Mexico’s?

Gary Shilling last month reviewed the EV industry:

Some excerpts and key charts:

• BYD’s sales volume last year was nearly double that of Tesla and more than three times the rest of the top 10 combined.

• But several EVs—like some Tesla models, the Ford Mustang Mach-E, Chevrolet’s Bolt, Hyundai’s IONIQ 5, the Kia EV6, the Volkswagen ID.4 and the Ford F-150 Lightning—are selling at or below the average price of a gas-powered car.
• It seems that once someone buys an electric vehicle, they’re a customer for life. It’s getting people to actually purchase an EV that seems to be a big challenge for the industry. There aren’t a lot of independent customer satisfaction surveys out there, but one conducted last June by the Pew Research Center found that only about three in 10 Americans said they would very or somewhat seriously consider buying an EV, down nine percentage points from a survey taken a year earlier. And those who were most interested were people who already own one.
• Despite a number of headwinds— Trump’s lack of enthusiasm for the industry in general, concerns about the availability of charging stations, a likely end to federal tax credits and other issues described earlier—electric vehicles are probably here to stay and should weather the actions of an Administration decidedly less friendly to the industry.
• A risk is that the Administration and Congress will enact new tax rules that are too restrictive, leading to automakers scrapping, scaling back or delaying their manufacturing plans, for both electric vehicles and the batteries that power them. Doing so could come at the cost of thousands of good-paying manufacturing jobs of the type that Trump campaigned on expanding.

Unfortunately, Shilling’s analysis was almost totally US-centered other than plotting the sharp increase in global EV sales. Here’s what Americans (and Canadians since the Trudeau government blindly followed Trump’s 100% tariffs, thinking what are friends for?) are prevented from seeing and experiencing:

Battery Technology Breakthroughs: batteries are now delivering higher energy density, improved safety, longer lifespan, and faster charging. Sodium-Ion Batteries are emerging as a sustainable, cost-effective alternative to lithium-ion, thanks to sodium’s abundance and ongoing engineering improvements to address weight and efficiency challenges. Advances in battery management systems have increased lifespan and reliability, while new chemistries and recycling methods reduce reliance on rare earth materials and improve sustainability.

Performance and Range Improvements: The average EV range has increased by about 200% over the past decade, with many new models offering 400–700 km (250–435 miles) per charge, especially in medium and large vehicle segments. Enhanced regenerative braking systems now recover more energy during deceleration, extending range and improving overall efficiency.

Charging Innovations: Modern EVs and infrastructure support charging speeds that can replenish 80% of battery capacity in 20–30 minutes, with some premium models achieving even faster times using 800-volt architectures, down to 5 minutes. Inductive charging systems are being piloted, enabling cable-free charging at home, in parking lots, or even at traffic lights, promising greater convenience in the near future. Vehicle-to-grid and vehicle-to-home technologies allow EVs to supply power back to the grid or home, turning cars into mobile energy storage units and supporting grid stability.

Powertrain and Energy Management: Next-generation electric drive units (e.g., Magna’s 800-V eDrive) deliver higher efficiency (up to 93%), better power-to-weight ratios, and reduced reliance on rare earth materials, further boosting performance and sustainability. Modeling and simulation tools optimize thermal management and energy consumption, enabling real-time adjustments to maximize efficiency and range. Industry-wide efforts are underway to create unified standards for EV power management, improving interoperability and energy savings across different vehicle platforms.

Before the current price war, over 65% of EVs sold in China were cheaper than the average ICE equivalent. Nearly half of all new cars sold in China in 2024 were electric. China’s ability to produce affordable, high-quality EVs has begun to impact global markets, with Chinese brands expanding aggressively into Asia, Europe, and emerging markets.

BTW, EV sales in the U.S. grew 11.4% YoY in Q1’25. Total sales were up 6.4%.

The share of new EVs sold in the US in Q1 2025 rose to 9.83% of total new vehicles sold, up from a share of 9.26% in Q4 2024, and up from a share of 7.9% in Q1 2024, according to Experian’s quarterly report today. To be clear, these are battery-electric EVs without an internal combustion engine and do not include hybrids and plug-in hybrids. (Wolfstreet.com)

Is the Immigration Crackdown Already Showing Up in the Labor Market? There are hints that the number of migrants in the U.S. labor force is declining. It will take time, though, for the full effects to show up.

Employment growth in industries that rely heavily on unauthorized workers has slowed. There has been a large decline in the foreign-born labor force since March. And recent immigrants appear more reluctant to take part in the Labor Department’s monthly survey of households. (…)

Data released alongside Friday’s jobs report showed that the number of foreign-born people either working or looking for work fell by about one million from March to May. That was the biggest two-month decline in the foreign-born labor force since the early days of the pandemic. Some economists pointed to that decline as an indication that more unauthorized workers are exiting the labor force.

That data is extremely volatile, though, and not adjusted for seasonal swings, which are severe in sectors such as farming. The ratios of both foreign- and native-born employed people to population have behaved similarly in the past year.

Immigration has long been an important source of labor in the U.S., particularly in recent years as the number of unauthorized immigrants flowing across the border surged. But the number of people coming into the country began falling in the later part of last year after the Biden administration tightened up the border. And it has fallen precipitously since President Trump came back into office, while raids on workplaces have made some immigrants fearful of showing up for work. (…)

It might not take long for the immigration crackdown to show up more clearly. The Labor Department’s employer and household surveys are based on midmonth readings. That means that the May jobs report that was released last week didn’t include the dialing up of immigration enforcement that came in late May after top White House aide Stephen Miller told Immigration and Customs Enforcement to “just go out there and arrest illegal aliens.”

The June jobs figures, due July 3, will be based on the pay period and week that includes the 12th of this month—that is, Thursday.

Goldman Sachs issued another great report on immigration yesterday:

Examining the Impact of High-Skilled Immigrants on the US Economy

• The number of approved H-1B visas and of international students enrolled at US universities have both climbed notably in recent decades, contributing to the steady increase in the number of college-educated immigrant workers in the US. In this Analyst, we zoom in on high-skilled immigrants, defined as those who arrived in the US for college and stayed to work and those who arrived in the US after having earned a college degree elsewhere.
• Despite accounting for only about 5% of the US labor force, high-skilled immigrants make up a much larger share of workers in many industries that require advanced education and specialized experience, such as information services, computer and semiconductor design, scientific research, and pharmaceuticals.
• High-skilled immigrants have made large contributions to innovation, business formation, and growth in the US economy. These immigrants account for 13% of the STEM workforce, represent 18% of doctoral degree holders in the US, hold 29% of US Nobel Prizes, and have led 30% of US patents in industries that are important for economic competitiveness and national security. Estimates from the academic research suggest that this group has founded 20% of venture capital-backed startups, patents at double the rate of native-born inventors, and is responsible for 25% of the aggregate economic value created by patents in publicly traded and private companies and 36% of aggregate innovation, as measured by patent citations.
• Estimates from academic literature suggest that each additional high-skilled immigrant in the US lowers the federal budget deficit by roughly $75k over ten years. Combining these estimates with our analysis of data from the American Community Survey, we estimate that high-skilled immigrants reduce the federal deficit by roughly $40-50bn in the decade after arrival, and that the entire stock of high-skilled immigrants in the US puts around $50-80bn in downward pressure on the deficit per year.
• Research on spillover effects on innovation among natives reaches somewhat more of a consensus and generally suggests positive externalities from skilled immigrants on patenting activity by native inventors.

 

AI CORNER

Navigating Coal Plant Retirements Amid Rising Power Demand Challenges

Factset follows up to my June 9 post about prospective Energy Bottlenecks in which I showed that electricity generation in the USA has been essentially flat for 15 years at roughly 4,200twh. The 2024 number is only 3% above 2018 and 4.5% above 2010. That’s a +0.3% CAGR since 2010 and +0.5% since 2018.

Net electricity generation in the United States from 1990 to 2024

Rising renewables and, mainly, natural gas production have simply offset the declining use of coal. Trump policies will likely slow renewables and 80% of natural gas pipeline expansion is tied to LNG export projects.

Importantly, about 78% of total U.S. dry natural gas production comes from shale formations. Indeed, much of the natural gas produced in the U.S. is a byproduct of oil extraction in shale plays.

Due to tariffs and rising costs for steel and equipment, the average breakeven price for new shale wells has risen. Many producers now require oil prices above $65 per barrel to justify new drilling, and some executives suggest $70/bbl is the new threshold for aggressive expansion. With current WTI prices hovering around $60–$63 per barrel, margins are tight and drilling activity is being curtailed.

Tariffs on steel (50%) and other imported equipment have raised well costs by more than 10%, further squeezing profitability and leading to fewer wells being drilled for the same investment.

It’s easy to say “Drill, baby, drill” but things are not so simple, are they?

Energy has become a key ingredient in AI investments, themselves key factors in overall economic growth. The US economy is clearly facing energy bottlenecks ahead while China has been aggressively investing in its energy production infrastructure while reducing dependance on coal.

 

Here`s Factset on the outlook for coal which now produces 15% of all US electricity generation.

With load forecasts projecting a sizable increase in power demand from sources like AI data centers, grid operators need to ensure they can meet this future load. One way to mitigate these concerns surrounding rising load would be to delay or cancel the retirements of coal-fired power plants. In this Insight, we’ll explore what could be driving these plants to retire, how much coal generation is currently scheduled to retire, and what facilities are going to stay online.

What’s going on with coal?

There are several factors that are contributing to the amount of coal plant retirements occurring over the next several years. However, two EPA standards scheduled to take effect over the next seven years may be causing some coal-fired facilities to retire earlier than they otherwise would.

First, there are new wastewater standards that coal-fired plants must meet to continue operating in 2029 and beyond. Currently, there are 49 GW of coal-fired capacity scheduled to retire before this standard comes into effect, which represents 26.5% of the currently operational facilities.

The second standard would force all coal plants operating in 2032 and beyond to either co-fire 40% with natural gas or reduce emissions by 90% by installing carbon capture technology. An additional 22.1 GW of coal capacity is scheduled to retire before this standard takes effect.

These standards may not be upheld, but any cancellation, delay, or relaxation of them may push out coal retirement dates. Doing this would keep much-needed generation for meeting growing load, especially when combined with new renewables, storage, and natural gas-fired generators.

On average, coal provided 80.7 GW to the grid on an hourly basis in 2024. Based on currently scheduled retirements and 2024 generation levels, this drops to 52.3 GW in 2032 after both EPA standards would have taken effect.

These retirements would have an even larger impact during peak months. Compared to July 2024, hourly coal generation could drop by 38.8 GW by July 2032, potentially making it more difficult to keep up with peak demand forecasts.

(…) As we look ahead, the EPA standards may be both too expensive for coal plants to consider adopting and causing early retirements.

However, if the EPA standards are relaxed to keep coal plants online to meet rising demand, the question remains whether coal plants currently scheduled to retire will be economic enough to keep open, regardless of circumstance.

S&P Global:

“We believe coal producers are already working to match current production with growing demand from increased large industrial loads expected moving into 2025 and 2026,” Senior Analyst at S&P Global Commodity Insights Wendy Schallom said in the Commodity Insights November US Coal Market Forecast. “While it doesn’t change the long-term outlook for thermal coal demand and ultimately supply in the US, it does extend the transition period as US coal generators push back on previously announced retirement dates and the competition between coal and natural gas continues.”

In addition to electricity demand growth from data centers and other sources, higher natural gas prices are expected to support US domestic thermal coal demand in 2025. Commodity Insights projects that natural gas prices will increase to $4.26/MMBtu in 2025, and $6.29/MMBtu in 2026, contributing to an increase in thermal coal consumption of about 40 million st per year (projections based on normal weather).