My third quarter started off with
ten wonderful days in France- Paris, Noveant-Corny, and Mont Saint Michel. I always said I didn’t want to go up into the
Eiffel Tower, but this time I went to the second level, which was high enough
for me. The view is astounding. The Notre Dame Cathedral is glorious once
again, so clean, so beautiful! We went
to Mont Saint Michel off the coast of Normandy and to see the GIs
Association, who welcomed our eighth visit since 2013 to spend time with them
as they honor my Uncle Stephen and the men of the 5th Infantry
Division who fought there for their freedom in 1944.
We went to Atlantic City for two days but were chased by the hurricane at sea with rip tide risks, rough seas, and rain coming inland. I’ll end the quarter with a trip to Rhode Island.
The Fed Lowers Rates- Finally!
Well, they finally did it! We got a measly 25 basis point cut in the Fed Funds rate to 4.25% and no relief from QT liquidating of bonds, especially MBSs. We are not much closer to neutral today than we were yesterday. Some economists estimate the neutral rate to be 2.50% to 3.00%. Adding to my frustration is the fact that the Bureau of Labor Statistics announced their annual payrolls revision for April, 2024 to March, 2025 of -911,000; 2024’s number was equally surprising and disappointing at -818,000. They blame the small business birth-death ratio adjustment, yet they never seem to make any changes. I’ve been writing about this for years! Instead of average payroll growth of 146,000 per month during the revision period, we now have 71,000 per month. Payrolls have gotten worse since then, with August adding only 22,000. June’s number was revised to a negative number, or loss of jobs. And the Fed gives us 25 basis points? Last September, they cut 50 basis points when employment was not as dire.Chairman Powell gave his obligatory press conference after the FOMC decision on September 17th. The statement he read was seemingly out of a textbook, with: dual mandates…we work for the American people…the rate cut was for “risk management” purposes…we are data dependent (backward looking)…we are well positioned, we were right to wait and see how tariffs, inflation, and the labor market evolved. No, I’m sorry. You were not right. Are you and your FOMC members not embarrassed by your GDP projections of less than 2% for years? Are you not embarrassed that you have not reached your PCE inflation target of 2% for the past five years and won’t achieve it, according to your own projections, for the next two years+?
And now I have a new goal- to avoid watching Powell’s press conferences for the remainder of his term. I will not listen to his double speak, textbook excerpts, and refusal to acknowledge that reporters’ questions raise good points and deserve answers. So, avoiding these press conferences will make my life simpler. I can read about it later.
Some of My Favorite Economic Indicators
Leading Economic Indicators (LEI)- This Conference Board indicator continues to slip, with August at -.5%, July revised +.1%, June -.3%, and May unchanged. The Board’s recession signal was triggered in May and again in August. For 35 of the last 39 months, the index has declined. (Exceptions were a tiny rise in July, 2025, and unchanged readings in March, 2024, November, 2024, and May, 2025). There used to be a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.Real GDP bounced back to +3.3% in 2Q25, following -.5% in 1Q25 with the tariffs/imports/inventories unusual activity, and +2.4% in 4Q24. The latest Atlanta Fed GDPNow estimate for 3Q25 is +3.3%. Tariffs can help create a diversified industrial economy which brings back manufacturing production that left the US over the years. Increased investment in our country will lead to more domestic production, a stronger dollar, and lower inflation/lower rates. Artificial intelligence has the potential to increase productivity, improving GDP while keeping inflation in check. One note about headline GDP: it is masking the fact that real final sales have slipped to +1.9% in 1Q25 and 2Q25, following +2.9% in 4Q24.
Productivity improved in 2Q25 to +3.3% from a dismal -1.8% in 1Q25. Higher productivity affords companies the chance to increase production and keep costs in check, i.e. lower inflation.
Moody’s Beige Book Index- In a follow up to last quarter’s newsletter, the September index returned to zero from its negative readings of -16.7 in July and -5.6 in June. The latest Beige Book showed six districts increasing modestly, including Philadelphia, two with no change, and four in decline. Half the country is begging for lower rate relief…
Unemployment continues to get worse and the rate rose to 4.3% in August from 4.2% in July. Payroll growth was anemic at +22,000. Household growth was +288,000, showing a real dichotomy in the two surveys. The pool of available workers (a Maestro favorite) is currently at 13.738 million. The augmented rate derived from this pool rose to 7.8% in August from 7.6% in July. Employer demand for hiring has definitely slowed; with the previously mentioned benchmark revisions, markets are uncertain and skeptical about having accurate employment measures. Some mention the Quarterly Census of Employment and Wages, or “QCEW,” as a better source, but its release would not be timely enough.
The M2 money supply continues its upward growth trend, with August and July y-o-y at 4.8%, June +4.5%, and May and April +4.2%. Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.
Housing- August was a dreary month for housing starts -8.5% and permits -2.3%. Builders have not yet cut back on rate buydowns and price discounts/incentives as new home sales rose +20.5%, paring inventory to 7.4 months’ worth of sales from 9.0 months in July. Mortgage rates have provided some relief recently, with the 30-year at 6.35%, which is clearly better than earlier this year. But affordability is still holding back buyers. Inventories for existing homes are still tight at 4.6 months’ worth of sales. Mortgage rates above 6% are still not low enough to encourage widespread sales of existing homes with mortgages below 4%.
Inflation
The headline CPI for August was +2.9% y-o-y; the core rate was +3.1%. Goods prices y-o-y were +1.5%, showing little effect from tariffs, while services were +3.6%. PPI for August was +2.6% and the core was +2.8%. PCE for July was 2.6% and the core was +2.9%. PCE is the Fed’s preferred measure and their 2.0% targets are based on PCE. Their targets are not based on CPI, which generally has run about .40% to .50% above PCE. So consider 2.5% a target for CPI. One of Powell’s few revelations from the recent press conference was that the Fed thinks that tariffs have added .30% to .40% to the inflation level so far.When Will the Yield Curve be Normal, i.e. Positive?
The Fed’s restrictive stance has distorted the yield curve for several years now. The curve was inverted for 26 months for the 10-year Treasury to the 2-year Treasury from July, 2022 to September, 2024; the 10-year Treasury to the 3-month T-Bill was also inverted for 26 months from October, 2022 to December, 2024. The usually historical prediction from both of these inversions for a recession never came true. Since 2024, we’ve seen flat curves, parts of the curve steeper such as 10-year to 2-year Treasuries, and an inverted curve for 10-year to 3-month Treasuries before it became positive again with the September 25 basis point rate cut. Bond vigilantes attacked again, right after the Fed announcement on September 17th. The 10-year Treasury was close to breaking 4% to the downside, but traders quickly sent it up 10 basis points. In protest of something, I guess…If the Fed continues to ease toward neutral, which could be 2.50% to 3.00%, long-term rates could decline, not in tandem , but about 50% of the move in short-term rates. That would be “normal” and would help the cause of lower mortgage rates. Slowing of QT in MBSs would help lower mortgage rates, too. By the way, the historical average of the10-year Treasury to 3-month T-Bill spread is about 1.10%; for the past 10 years, it has been about .80%, pulled lower by years of low inflation prior to 2021. Today, the spread is .19%
Happy Events
I mentioned our trip to Paris in July. It is very special exploring that city. And Mont Saint Michel! I must admit, I really needed to catch my breath after climbing 300+ steps up to the Abbey. What a glorious feeling it was to be at the top of this mountain. Views are spectacular. The feeling is very spiritual when thinking about the millions of people who have made this journey before us to the island and climbed this mountain. Saint Michael, protect us!I appreciate your support! Thanks for reading! DLJ 09/24/25
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.
Disclaimer: This publication is provided to you solely for educational and entertainment purposes. The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed. The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice. The author cannot provide investment advice but welcomes your comments.
