The Tepid Trump Economy Growth fell in the second quarter, despite the AI business spending boom.
The WSJ Editorial Board
(…) The U.S. economy grew a tepid 1.5% during the second quarter, driven by consumers and AI investment. Consumer spending contributed 2.1 percentage points, while business investment added 1.2 points. Net exports subtracted a point from GDP, which is a statistical wash since imports flow into consumer spending and investment. (…)
Equipment purchases and intellectual property accounted for all of the uptick in business investment. AI hyperscalers, which plan to spend upward of $700 billion this year, are turbo-charging demand for computer chips, construction equipment, gas turbines and more. Businesses are also pumping tens of billions into frontier AI models.
Mr. Trump thinks that, with the stock market hitting records and the economy avoiding recession, his tariffs are working wonders. But based on Treasury Secretary Scott Bessent’s 3% GDP growth target, the economy is underperforming by half. Last year’s tax bill and deregulation would be driving faster growth if not for Mr. Trump’s border taxes that raise costs and uncertainty for business. (…)
The personal consumption expenditures (PCE) index—the Federal Reserve’s preferred inflation measure—excluding food and energy rose only 0.1% in June. This disinflation is a good sign, but the core PCE measure is still up 3.3% over the last 12 months.
Persistent inflation also means Americans are socking away less for retirement or a rainy day. The savings rates in June declined to 2.7%—the lowest since spring of 2022. It exceeded 6% for most of Mr. Trump’s first term. Real disposable personal income fell 1.5% in the second quarter, compared to growth of 2% to 4% during his first term before the pandemic.
Some of Mr. Trump’s most ardent fans tell us they wish he’d drop his tariff fixation and return to the supply-side policies that produced broad-based prosperity during his first term. Most Americans probably do too.
Elsewhere in the same WSJ:
Economists said the headline number clouded the largely positive trends. Solid spending by companies and consumers points to continued economic strength in the second half of the year, analysts said.
“What I saw was robust consumer spending and a sustained increase in capital expenditure driven by the AI build-out,” said Joseph Brusuelas, chief economist at RSM.
Ernie Tedeschi, chief economist at payments company Stripe, calculated that gross computer spending—which includes capital expenditures on computers and data center construction—made a major contribution to the second quarter’s 1.5% growth rate.
“More than half of real GDP growth in the second quarter alone was attributable to computers or data centers or something adjacent to information-processing equipment and software,” Tedeschi said.
Consumer spending, the economy’s main engine, rose at a 3.2% pace in the second quarter, picking up from 0.5% in the first quarter of this year. Consumers—buoyed by tax cuts—increased their spending on both goods and services. This was despite regular gasoline averaging $4.22 a gallon from April through June, according to AAA data.
A measure of underlying demand that carves out more volatile government, inventory and international trade numbers also strengthened. Called final sales to private domestic purchasers, this measure rose at a 3.9% rate in the second quarter, up from 1.7% in the prior quarter and the fastest pace since the first quarter of 2023.
GDP reflects the total of all spending. But since some of that spending is on imported products, rather than things made in the U.S., imports are considered a drag on GDP.
That math played a role in the second quarter, when net exports—a measure of what the U.S. exports minus what it imports—subtracted a percentage point from the headline GDP number. Inventory investment also weighed on growth last quarter as businesses slowed stockpiling.
Part of this stems from the AI boom, which has boosted demand for foreign-made equipment. (…)
Fed Chairman Kevin Warsh characterized the economy and labor market in broadly positive terms, noting strength in productivity and investment in artificial intelligence.
“The economy is showing impressive resilience,” Warsh said during his postmeeting press conference. (…)
The latest batch of economic data suggests that the US economy remains in remarkably good shape. Domestic demand is strong, and the labor market continues to show resilience.
Inflation isn’t as picture-perfect. While June’s PCED report provided some welcome relief, recent inflation shocks may spread in coming months. They include another round of tariffs, the AI building boom, high energy prices, and supply-chain disruptions. They will likely keep inflation above the Fed’s 2% y/y target. (…)
In Q2’s GDP report, inflation remained troublesome. The core PCE rose at a 3.4% annualized rate, well above the Fed’s 2.0% target. (…)
The PCED for goods eased to 3.7% y/y in June from 4.0% in May. Much of the moderation reflected a 9.6% m/m drop in gasoline prices. Meanwhile, tariff-related price pressures have yet to fully fade, and the ongoing AI buildout should continue to boost inflation across the technology ecosystem. Together, these forces suggest that goods inflation will remain elevated in the months ahead.
The PCED for services eased to 3.7% y/y in June. “Supercore” PCED for services (excluding both energy and housing) edged down to 3.8% y/y (chart). Part of the improvement reflected weakness in volatile categories such as hotel accommodations and nonprofit services. It remains stuck above 3.0%. (…)
June’s saving rate declined to 2.7%, the lowest since 2022. We expect it will continue to fall as more Baby Boomers retire. They no longer earn labor income, but they are continuing to spend their sizeable net worth.
Real consumer spending rose 0.4% m/m in June, lifting the three-month average growth rate to its highest level since August 2025. Gains were broad-based, with particularly strong increases in discretionary categories such as restaurants and hotels, recreation, and apparel.
Back to Mr. Warsh:
(…) Once again, the Bond Vigilantes are pushing bond yields higher. In effect, they are saying that if the Fed won’t be vigilant about inflation, then they will have to maintain law and order in the economy.
Under the circumstances, we conclude that the Fed has to raise short-term rates to lower long-term rates. Talking hawkish but not acting so reduces the Fed’s credibility. (…)
The 10-year and 30-year Treasury bond yield have been rising in recent weeks. That has been a warning from the Bond Vigilantes to heed the message of the 2-year yield. Warsh talked hawkishly today. But he did not deliver a FFR rate hike. So bond yields rose. Arguably, Warsh failed his first credibility test. Warsh’s own hawkish words set the standard against which he is judged. (…)
Warsh rejected any suggestion that the Fed will tolerate above-target inflation: “There is no soft inflation target. There is no soft implicit target. There’s only a target, and it’s 2 percent.” (…)
By dialing back forward guidance, forecasts, and policy signaling, he believes market prices can offer a cleaner read on underlying economic conditions, with investors “learning to play the ball, not the referee.” But he stressed that policymakers are “not going to be constrained by market prices.” Markets can inform policy, but they won’t dictate it. (…)
FOMC participants spent considerable time debating whether the AI-boom, tariffs, energy shocks, and supply chain disruptions are generating broad inflation pressures or merely isolated price increases. Warsh said that the Fed is “watchful thinking, not watchful waiting.”
Warsh also stated, “I wouldn’t characterize what we did as anything like a pause.” Instead, he framed the decision to hold rates steady as a “rigorous review.” He described the meeting as a deep, active evaluation of unresolved structural questions.
In plain English, “we don’t know”.
Warsh talked like a hawk. However, the bond market wanted a rate hike. If incoming data continue to show resilient economic growth with full employment and persistent inflation pressures, Warsh will have to act like a hawk.
Just a hint:
Another Hint from WolfStreet:
Overall inflation in GDP (“GDP deflator”), which tracks inflation in the entire economy, soared by 6.3% in Q2 from Q1 annualized, the worst since Q2 2022.
Without energy and without food, inflation in GDP jumped by 4.4% in Q2 from Q1 annualized, the worst since Q1 2023.
Year-over-year, GDP inflation without energy and food, jumped by 3.8%, the worst since Q2 2023 (red in the chart below).
Both of these measures – overall inflation in GDP and core inflation in GDP – show red-hot inflation across the US economy for all participants in the economy. And on a year-over-year basis, these inflation rates have been accelerating sharply for four quarters in a row. This isn’t just a new thing that happened with the war in Iran.
(…) Warsh seemed to suggest that rate increases might not be necessary because bond yields had already climbed in recent months—galling to many investors because that increase had been based on an assumption that rate increases were coming soon.
In addition, Warsh suggested that the Fed could consider a range of inflation indicators beyond its official gauge, the personal-consumption expenditures price index. He said that higher rates “could well be part of” the solution to high inflation rather than the main one.
Investors and analysts were unusually sharp in their criticism, with some saying that Warsh would have caused less damage if he hadn’t even held a press conference.
“I think our last choice would have been what we got yesterday,” said Christian Hoffmann, head of fixed income at Thornburg Investment Management. “Warsh suggested policymakers should follow the bond market rather than lead it, and the bond market’s response was to punch him in the face.”
Investors stressed that there was a difference between Wednesday’s sudden jump in yields and the orderly climb that preceded it. Since March, bonds have been pressured by both rising energy prices and solid labor-market data, which shifted investors’ rate expectations. That move has already pushed up borrowing costs but raised few alarms because it was based on economic fundamentals.
Investors on Thursday still offered several reasons for optimism. For all their disappointment with Warsh’s comments, some noted that there still isn’t a clear-cut need to raise interest rates after inflation showed some signs of cooling in June. If that trend continues, the Fed could get away with not raising rates in September, they said, especially if Warsh can do a better job explaining the rate-setting committee’s thinking.
If inflation data is less favorable, there are signs that most investors still think the Fed would raise rates—with or without Warsh’s backing.
Interest-rate futures showed Thursday afternoon that traders saw a 63% chance that the Fed will raise rates in September. That was down from 76% Tuesday, but still up from 56% late Wednesday, according to CME Group data.
Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, said investors were likely to be comforted in the coming weeks as other Fed officials came forward to explain why they didn’t raise rates and what could cause them to change their position in the future.
“I think it’d be positive for bonds to know that the committee is still in charge, not one person,” he said.
(…) Markets respond not just to data but how they think the Fed will respond to data. Investors plug each new bit of information into the Fed’s assumed “reaction function,” which then spits out the appropriate interest rate.
If the markets correctly understand the Fed’s reaction function, then they can do some of the Fed’s work for it. When the economy is overheating, bond yields will rise, which will slow the economy and squelch the threat of higher inflation. If the economy is weakening, yields will fall, and the economy picks up, safeguarding employment. Warsh alluded to this mechanism Wednesday: “Even while at some level we haven’t done much in 42 days, the markets have done quite a bit.”
But this only works if the Fed actually behaves as markets expect. Bond yields rise because they are pricing in higher short-term rates. If the Fed doesn’t deliver, that pricing will reverse.
Bond yields rose between the June and July meetings because of growing expectations that the Fed would raise interest rates. But the Fed didn’t deliver. As to why, Warsh declined to say.
When June’s benign inflation report was released, markets certainly saw that as a reason not to tighten. Yet Warsh said it was “not much” of a factor: “We are not relying on any one individual piece of data.”
So how are markets supposed to interpret inflation data in the future if they are told such an important release had no bearing on interest rates? (…)
Kevin Warsh’s second press conference as Federal Reserve chairman puzzled economists and investors, who appear unconvinced the new central bank chief is as committed to stamping out inflation as he says.
Warsh, who has said he won’t share his view of when or whether the Fed might adjust interest rates, went further on Wednesday and refused to explain how policymakers might react to different economic outcomes. He praised a run-up in bond yields since the Fed’s last meeting, arguing it was helping the central bank and could mean officials don’t need to raise rates to bring down inflation.
Investors responded by dumping 30-year Treasury bonds and dialed back expectations for rate hikes over the coming months. (…)
He’s been adamant about not issuing “forward guidance,” or an indication of what the Fed might do in the future, and yesterday he argued it’s working. While Warsh isn’t speaking much about what he thinks Fed policy should do, other Fed officials still are. Some analysts said the Fed chief’s characterization of what’s going on in markets isn’t right — investors are listening to his colleagues, trying to forecast what the Fed might do, then pricing that in. (…)
he seemed to acknowledge interest rates are only one part of the Fed’s arsenal. Taken with the comments he made about higher bond yields helping policymakers do their job, Warsh seemed to suggest the Fed might not need to increase rates to bring down inflation.
The Fed has other policy tools — including its balance sheet — and financial markets do influence the broader economy, but the central bank has primarily relied on adjustments to interest rates to control inflation or bolster the labor market. Warsh’s comment left Fed watchers wondering how, exactly, he would deliver stable prices without raising rates. (…)
Circularity is the word of the year!
Trump’s Tariffs Are Sending Some Companies Back to China For some U.S. brands seeking a location for their factories, the economic logic is once again pointing to China.
(…) When President Trump’s tariffs on China hit 145 percent last year, companies embarked on a panicked search for cheaper alternatives in countries like Vietnam and Thailand, including this facility.
But since then, U.S. tariffs on China have come down sharply, leaving the leaders of some of those same companies with second thoughts. (…)
One of the most surprising outcomes from a whiplash year of tariffs may be that China has emerged in a position of relative strength, with significantly lower tariffs than last year. The Trump administration last week imposed a new tariff rate on Chinese exports of 12.5 percent, similar to rates for dozens of other countries, as it works to resurrect the tariffs struck down in February by the Supreme Court.
Chinese exports are still subject to other duties, including from Mr. Trump’s first term, and more tariffs could be on the way. But many industry executives and analysts speculate that the Trump administration will keep future tariffs on China relatively restrained to try to stabilize a rocky relationship.
The overall U.S. weighted tariff rate on Chinese goods is slightly above 23 percent, according to an analysis by Guojin Securities, a Chinese financial firm. And for some products, the tariff rate for China is identical to the rate on exports from Southeast Asian countries, where many companies have moved their supply chains.
(…) making flashlights in Thailand costs as much as 15 percent more than it does in China, as a result of higher costs for materials and transport. Mr. Laster is also under pressure from Chinese competitors that are selling flashlights on Amazon for less than it costs ACG to ship its products to the United States.
“We don’t want to go back to China, but at the same time, we’ve got a business to run,” he said. (…)
“China keeps doing really well because they just have the scale to produce things that much cheaper,” said Deborah Elms, who is head of trade policy at the Hinrich Foundation in Singapore. (…)
North American brands have shifted more of their sourcing back to China in recent months as fuel shortages from the war with Iran further strained factories in countries like Vietnam, said Sebastien Breteau, the founder of Qima, which audits supply chains for thousands of companies, including Costco, Amazon and Ralph Lauren.
Amazon, Microsoft Results Show AI Spending Spree Remains Solid
Aggressive AI spending plans by Amazon.com Inc., Microsoft Corp. and Alphabet Inc. provided fresh evidence that demand for chips and related equipment will remain strong, offering relief to a sector that’s been battered in recent days.
Amazon boosted its forecast for full-year capital expenditures to $220 billion on Thursday, up from a previous estimate of $200 billion. And Chief Executive Officer Andy Jassy said most of that spending will go toward artificial intelligence. (…)
Microsoft affirmed its capital expenditure forecast, absent the impact of an accounting change. Google parent Alphabet raised its spending outlook, and Meta Platforms Inc. increased the low end of its guidance for capital expenditures.
That’s good news for the businesses that make chips, networking gear and other technology used in data centers. Fears of a potential spending slowdown had weighed on shares of those companies. (…)
Amazon investors applauded its results, which showed that cloud computing revenue accelerated for a fifth straight quarter. The message: The company’s spending spree is getting results.
Microsoft got a similarly warm reception. It added nearly half a trillion dollars to its valuation on Thursday after reporting the fastest cloud growth in four years. The $450 billion increase to its market capitalization was the biggest single bump for any company in history.
Investors were less impressed with Meta and Alphabet. In both cases, the companies were dogged by concerns that their expenditures didn’t have a clear payoff. (…)
In any case, all that spending is poised to benefit suppliers that had been under a cloud recently. (…)
Several of these companies were among the public holdings of Leopold Aschenbrenner’s hedge fund, Situational Awareness, which sold off some of its equity positions after suffering losses in the AI stock rout in recent weeks, according to people familiar with the matter. That may have accounted for some of the stock declines. (…)
Apple Slides After Supply Shortages Hurt Sales Forecast
(…) Apple has been struggling to secure enough computer processors and counter fast-rising memory costs, a situation that forced the company to raise prices on Macs and iPads last month.
The supply crunch has also led to extended wait times on key computers like the Mac mini and Mac Studio. On the call, Chief Executive Officer Tim Cook said constraints would affect more Macs, iPhones and iPads in the current quarter. Currency fluctuations are hampering growth as well.
The disappointing forecast sent Apple shares down about 7% in premarket trading on Friday. (…)
If Apple is impacted by shortages, imagine smaller players.
BTW, Apple has borrowed from car manufacturers’ playbook to help customers fight inflation:
The company is also making some changes to how it offers products. On Tuesday, it rolled out a device leasing program called Apple Upgrade, allowing users to essentially subscribe to iPhones, iPads and Macs and trade them in at the end of their lease terms. The program, which resembles car leasing, will likely mitigate the recent price increases for many buyers.
Corporate insiders are sending warning signals about the stock market Corporate insiders haven’t been this bearish in more than 20 years
(…) Consider the measure of insider sentiment favored by Nejat Seyhun, a finance professor at the University of Michigan and a leading expert on interpreting insider behavior. This measure is the number of companies with net buying from corporate officers and directors, expressed as a percentage of all companies that had any buying or selling from those insiders. (…)
Seyhun has found from his research that insider selling is an especially bearish signal when it comes in a declining stock market. When that happens, it usually means that insiders on balance are not confident that the market will recover quickly enough to make waiting to sell worth their while. (…)
Insider sentiment has been trending lower for several years now, as you can see from the accompanying chart. The Seyhuns’ insider-sentiment measure has been below average for a large majority of months during the last three years.
To be sure, the stock market has been remarkably resilient over these three years in the face of above-average insider selling. So at a minimum, the insiders’ caution has been premature. It nevertheless seems a good bet that, sooner or later and quite likely sooner, the market will succumb to the gravitational pull of insider bearishness.
From Gurufocus:
As of July 2026, the current Overall Market Insider Buy/Sell ratio is 0.23. The previous monthly ratio was 0.27. This means insiders’ buying activity is lower, indicating they may be less optimistic about the market than last month.
For the past 5 years, the highest Overall Market Insider Buy/Sell ratio was 0.81 in May 2022, while the lowest ratio was 0.17 in February 2023. The average Insider Buy/Sell ratio is 0.35.
Compared to the past 5 years, the current Insider Buy/Sell ratio of 0.23 is lower than the 5-year average, meaning insiders are less actively buying and might be less optimistic about the market.
INK Research:
Insider trading windows are starting to open as companies report Q2 earnings, and we see that the level of absolute dollar insider selling has picked up and is now above average for a typical 60-day period. Last week, our INK US Indicator was at 25.4%. In the time since, it has dipped under the 25% mark and was at 24.1% as of Tuesday.
At 25%, there are four stocks with key insider selling for every one stock with key insider buying over the past 60 days. That is the lowest the indicator has been in a year, and it is notably lower now than it was during the market sell-off in the opening months of the Iran War. Moreover, our shorter-term 30-day indicator is also weakening. It was at 18.4% a week ago and has now fallen to 15.6%.
At the sector level, Industrials, Consumer Discretionary, and Consumer Staples sentiment have continued to weaken. As we noted last week, we had Consumer Staples, the last remaining sector without an overvalued reading, on watch for a potential downgrade to overvalued. We are now downgrading it.
Solar to Soon Pass Coal as China’s Top Power Capacity Source
(…) Total installed generating capacity is expected to reach 4,300 gigawatts by the end of 2026, with solar and wind accounting for about half of the total, the council said in its latest power industry forecast. The share of thermal power is projected to fall further to 31%. (…)
FYI:
Data: Silver Bulletin. Chart: Noah Bressner/Axios
Yesterday:
The defense minister himself, Prince Khalid bin Salman, went to the White House and asked U.S. President Donald Trump and Vice President J.D. Vance to wind the war down.
In Washington, the Saudis said they did not intend the strikes in Iraq as a move toward a bigger war, and they would rather the Americans talked to the Iranians than bombed them. Israel’s Prime Minister Benjamin Netanyahu was in the same building this week arguing it the other way. The Saudis have also opened their own channel to Yemen’s Houthis—the militia that was attacking their tankers in the Red Sea last week—while asking the Americans to stay out of it.
To be continued…
