Adverse Aggregate Demand Shock(s)

Tariffs reduce employment, the pandemic distorted the delayed employment report, the BLS and Fed might steal the Santa rally, reducing risk

In this week’s note…

• Hawkish FOMC participants are arguing the increase in unemployment and 150-year history of tariffs triggering an adverse aggregate demand shock are betting, it’s different this time.

• A crucial channel for demand shocks is business confidence, or uncertainty in econ-speak. There is plenty of evidence during the ‘18-’19 trade war, and the 8-months since Liberation Day that the trade shock reduced capital spending plans and employment.

• The delayed September employment report headline was flattered by the same pandemic corrupted seasonal adjustment factors that boosted employment in the 16-24 age cohort. Labor demand is contracting faster than supply. The unemployment rate is up a full percent from the cycle low.

• Fed President’s Logan and Hammack want to lean against the AI bubble, they should accelerate DT and reduce the policy rate to 3% to rebalance policy and reduce the inflationary debt monetization impulse.

• We are modestly reducing portfolio risk by lowering our exposure to small caps, materials and energy.