Guest Post:Financial Markets and Economic Update For Second Quarter 2Q26

I start my newsletter on a sad note this quarter.  On June 22^nd, former Federal Reserve Chairman, Alan Greenspan, died at the age of 100.  He served as Fed Chairman from August, 1987 until his term expired at the end of January, 2006.  He was Fed Chairman during my formative years at Meridian Bank in Reading.  He guided us through the crash of 1987, the S&L crisis of the 1980s and early 1990s, the CRE crisis of 1990, the tech stock bubble of 2000-2001, September 11^th and subsequent recession, and left his position before the housing crisis grew into the Great Recession of 2008.  I’m still mad at him for raising interest rates so much in 1994.  On the positive side, he guided us to ten consecutive years of GDP growth from 1991 to 2001.  I, like most investors and banking industry professionals, had a love-hate relationship with him.  But to many of us, he will always be the Maestro.

Iran

The Iran conflict (or is it a war?) dominated the headlines and caused turmoil in markets- stocks, bonds, crypto, and commodities- during the 2Q26.  WTI crude prices peaked at $111.50 per barrel in early April, but right before the conflict began at the end of February, crude was at $68; the increase was +64%.  WTI crude is now back down to $70 today.  Gas prices spiked from just below $3.00 per gallon to $4.56 on May 21^st, and have fallen back to $3.88 today, for a much slower pace of decline.  Price increases likely would have been much worse had the US not had such high oil capacity.  Earlier episodes of oil price spikes in 1974, 1979, 1991, and 2022 were longer lived and quickly changed from inflation risk to recession risk. 

The primary issue is the danger to shipping in the Strait of Hormuz as Iran fired upon and threatened ships there.  The US set up a blockade so that Iranian oil could not leave the country, pressuring their economy.  While the US does not face oil and gas shortages, many countries do.  Europe imports 95% of its oil, China 75%, and Japan 99%.

The US is trying to negotiate with Iran and has a fragile 60-day ceasefire, but can we trust this global threat?  They use short- and long-range ballistic missiles and drones to threaten their region and the world.  They threaten ships in the Strait, support terrorists like Hezbollah and Hamas, continue to seek nuclear weapons, and kill thousands of their own people as they did earlier this year.  Can we even trust them to not build a nuclear weapon?  I think not.  Stock markets don’t trust them either, judging from recent volatility.

Change Has Come to the Fed- Finally

Kevin Warsh was sworn in as new Federal Reserve Chairman on May 22^nd at the White House (as Greenspan had been in 1987) and a new era began.  Warsh served on the Fed’s Board of Governors previously, from February, 2006 to March, 2011.  Like Greenspan, he believes productivity should be a major factor in monetary policy decisions and that the Fed should not just rely on published data and rules of thumb like the Phillips curve.  Artificial Intelligence right now is expected to lead to another productivity boom, just as the personal computer and the Internet did in the 1990s.  It was no surprise that there was no change in rates at Warsh’s first meeting while he contemplates what to change at the Fed.

Jerome Powell’s term as Chairman expired in May but, like company that doesn’t know when to leave a party, he insisted on staying on the Board of Governors.  It is a highly unusual move and last occurred in 1948, when Fed Chairman, Marriner Eccles, refused to leave the Board when his chairmanship ended despite a request by President Truman to step down.  Why do we give separate Chair and Board terms to these obnoxious people?  On May 31^st, Powell received the Profiles in Courage award from the JFK Presidential Library.  For what exactly?

Chairman Warsh is setting up five working groups to review monetary policy and operations, how to communicate to markets and to the public, data sources and potential new ones, productivity and job growth, and inflation measures and targets.  Hopefully he dumps the SEP, or Summary of Economic Projections, because it is often ridiculous, senseless, and more inaccurate than accurate.  (For this quarter, Warsh did not provide any projections; the other 18 FOMC members did).  Does it bother anyone that they project inflation to fall but it always takes two years to get to target?  Does it bother anyone that they project low GDP growth, but don’t project lower rates?

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- Could we be seeing the bottoming and reversal of the nearly four-year negative cycle in the LEI?  May’s index was +.1%, following April’s rise of +.3%.  March was down -.6% likely due to the shock of the Iran conflict, and February rose +.3%.  The index had declined in 39 of the last 47 months.  We’ve seen three increases- all this year and five months of no change in 2024 to 2026.  LEI had signaled recession many times in those 39 months, but like the inverted yield curves of 2022 to 2024, a sustained downturn in GDP never occurred. 

Inflation- The Iran conflict led to a spike in oil prices from $68 to $111.50 in April and we have seen prices fall back in May and June when hopes of an end to the conflict are at their highest.  However, headline and core (ex. food and energy) prices that were trending down toward targets are now uncomfortably high.  CPI for May y-o-y was +4.2% and core was +2.9%.  PCE in May was +4.1% and core was +3.4%.  PPI for May was +6.5% and core was +4.9%.  It feels like 2022-2023 all over again, but the measures are all expected to decline as oil prices and the slower moving gas prices drop back down to pre-conflict levels.  We are still in the unnatural and unprecedented situation where PCE is too close to or greater than CPI;  May PCE of +4.1% is just .1% under CPI of +4.2%.  May core PCE of +3.4% is .50% greater than May core CPI of +2.9%.  CPI is supposed to be .50% higher than PCE in a normal relationship.  I’m currently reviewing the “Truflation” measure, which is a real-time y-o-y estimate for CPI, started in December, 2021.  For you Bloomberg users, the ticker is TRUFUS44.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.5% for 2Q26.  GDP had improved in 1Q26 to +2.1%, following +.5% in 4Q25.  Nominal GDP was +5.1% in 1Q26, falling from +5.8% in 4Q25. 

Moody’s Beige Book Index- The June, 2026 Beige Book showed a lot of improvement.  Ten districts increased, one was flat, and one declined, which sadly was our own Philadelphia district.  The Moody’s index improved to 36.1 in June, following 25.0 in April, and 16.7 in March.

M2 Money Supply- M2 y-o-y growth was unexpectedly stronger in May at +5.6%, following April +4.7%, March +4.3%, and February +4.3%.  Finally, May’s growth is close to the average nominal GDP growth of +5.5% for 1Q26 and 4Q25.  We saw outright declines from December, 2022 to March, 2024 that were hurtful to growth.  The velocity of money has been flat at 1.41 in 1Q26, 4Q25, and 3Q25.  (Remember GDP=M x V).

Spacex and the Markets

Spacex completed the largest IPO in history on June 12^th, priced at $135 per share.  Trading opened at $152.75, hit a trading high of $225 within days, and slowly faded back to $153 on June 26^th.  Elon Musk became the first trillionaire with that issuance. The market cap stands at $2.0 trillion.

Spacex isn’t the only stock to rise and then fall back this quarter.  After stocks fell in March and April, prices rallied in May into June, before turning down as we see volatility with Iran and quarter-end repositioning.  The S&P 500 forward PE ratio is about 23 (19 to 24 is typical in a bull market).  AI investment and buildout will take an estimated three to five years and should lead to increased productivity, increased corporate profits, and increased GDP growth, albeit with potential increased job losses.  With the pool of available workers growing steadily and now at 14,063,000, this could spell bad news for the labor market.  Inflation will likely decline in this scenario.  (Warsh knows).

Don’t forget bonds.  They’ve been very volatile with a tendency toward rising rates most of the quarter.  During 2Q26, the 2-year Treasury yield rose 30 basis points to 4.09%, the 5-year Treasury rose 20 basis points to 4.13%, and the 10-year Treasury rose 5 basis points to 4.37% (after peaking at 4.50% with worries about the budget deficit, US debt/GDP at 122.8%, and uncertainty over term premiums).  Mortgage rates remain stubbornly high.  Watch out. The curve is flattening.

World Cup

Soccer fans have taken the US by storm, with an estimated 1 million to 5 million fans visiting the US, Canada, and Mexico for the matches.  Among the favorites are USA with Pulisic, France with MBappe (my personal favorite), Argentina with Messi (the greatest), England with Kane, and Norway with Haaland.  My niece got to go to the Ghana match in Philadelphia yesterday to cheer on her home country.  It has been exciting to watch some of the matches, but the 0-0 ties are a little trying.  It’s truly exciting as foreign visitors are praising the great time they are having in America. 

Large Hadron Collider

CERN has scheduled another long shutdown (LS3) for the LHC starting tomorrow to increase its capacity; this shutdown will last until June, 2030.  Other shutdowns included the September, 2008 one right after the LHC was started up on September 10, 2008, due to electrical issues and helium leaks and coincided with the Great Recession.  A temporary shutdown occurred in November, 2009 when a bird dropped a baguette into the electrical substation.  LS1 was from February, 2013 for two years, and LS2 was from December, 2018 for over three years, coinciding with the covid-19 pandemic.  We will wait for what’s next.  In all these years, I only remember one important discovery, that of the Higgs Boson particle in 2012.  Perhaps they don’t tell us everything.  Why would they keep spending extreme amount of money on the LHC?  Maybe they will someday tell us. 

Italy- Here We Come!!

This summer, we will visit Milan, Lake Como, Florence, Pisa, Tuscany towns of Chianti and San Gimignano, Cinque Terre, and Rome.  We are just praying that the 100+ degree heat wave ends before we go.  We have an excellent Italian travel agent who took care of all details- large and small.  I highly recommend her and if you plan a trip to Italia, let me know and I’ll give you contact information.

The Italian economy is producing just +.5% GDP growth despite its strength in manufacturing.  Unemployment is 5.7%.  Government debt is putting a drag on growth, with the debt/GDP ratio of 133.3%; US growth is also slowed by its ratio of 122.8%.  Prime Minister, Giorgia Meloni, has her hands full trying to improve the economy while navigating the EU rules. 

So, for now, arrivederci!

Thanks for reading!  As always, I appreciate your support!  Viva l’Italia!  DLJ 06/28/26

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.

Guest Post: Financial Markets and Economic Update for First Quarter 2026

 A Wild and Cold Quarter

I can only remember one other winter that was as cold as what we just experienced.  A snowstorm hit the Northeast on January 25^th, followed by a period of ice and freezing rain and days and days of a polar vortex, with brutally cold temperatures and wind chills.  Many days did not make it out of the single digits and roads were icy and winds fierce.  It reminded me of January, 1994, when we had a similar storm of snow and freezing rain.  Temperatures didn’t get above freezing for two weeks then, at which time the ice on the roads finally melted.  Every bone in your body felt frozen.  We escaped to Florida at the end of February and basked in the warmth.  We even got one moment of fame, when the Golf Channel filmed us live as we were getting our picture taken at the infamous Bear Trap at PGA National during the Cognizant Classic on February 27^th.

The quarter will also be remembered for volatile markets and a lot of events that moved markets.  Rallies on stocks, bonds, gold, silver, cryptocurrencies, and energy prices were soon met with selloffs and volatility.  The quarter started with the surprise of the US Military entering Venezuela on January 3^rd, arresting Nicolas Maduro and his wife, and bringing them to the US.  Venezuela surprisingly cooperated with the Trump Administration afterwards in opening their oil markets; the benefits to the people there will hopefully be an economy that grows and a life with freedom.

On January 30^th, President Trump nominated Kevin Warsh for Federal Reserve Chairman to replace Jerome Powell when his term expires on May 15th.  (In my mind, May cannot come soon enough).  The markets fell from their lofty highs, especially gold and silver, when they realized Warsh’s actions might actually support and defend the dollar.  Warsh believes that interest rates can be lower and the economy can grow strongly without inflation, with something called productivity.  Warsh also believes in targeting money supply to control inflation, which would make Milton Friedman proud.  Enough of the Phillips curve.  Enough of the ridiculous economic projections and the even more ridiculous Dot Plots.  Enough of thinking it’s okay to meet your inflation target two years out (i.e. do your job), as nearly every recent projection has shown.  Enough of the bloated Fed with its 3,000 economists and staff.

I’m not alone in my disgust for Powell.  On March 18^th at his press conference (which I heard about later since I avoided watching him), Powell said he would stay on as Chairman Emeritus if Warsh was not confirmed by the Senate by May and would, in any event, stay on the FOMC until the DOJ’s criminal investigation is concluded.  The markets hated to hear this.  Stocks sold off immediately and ended the day with losses.  The man who I once called a hero at the beginning of the Covid pandemic (what is wrong with me?) has overstayed his welcome.  He does not have any answers.  “We just don’t know” is his favorite phrase.  Enough!

A partial government shutdown occurred on January 31^st, with DHS as the only Department not funded.  Democrats did not want ICE funded.  Hello…ICE was already funded into 2029 in the OBBB passed last summer.  But still DHS is unfunded today and TSA is in the headlines, with airport security lines in many cases taking three to four hours due to short staffing and resignations.  Ironically, ICE was sent in to help TSA.  I’m so glad we traveled in late February.  FEMA, the Secret Service, the Coast Guard, cybersecurity analysis, and other operations are also unfunded and held hostage still.

Speaking of late February, on the 28^th, the US and Israel began a bombing campaign on Iran.  The decision was made urgently when the Iranian foreign minister bragged to US negotiators that Iran had 440-460 kilograms of 60% enriched uranium, sufficient, with more refinement, to make eleven nuclear warheads within a short time.  The Iranian people had tried peacefully protesting the regime in January, only to have an estimated 30,000 citizens shot/killed by Iranian “security.”  Trump promised that “Help was on the way” and it arrived.  One of the first bombs killed the Ayatollah and 40 senior leaders.  Since then, the bombing has been non-stop, but Iran has lashed out with drones and missiles fired at its Middle East neighbors, especially Israel, and has been threatening ships in the Strait of Hormuz.  This matters because crude oil is trading at $96 per barrel today and Brent crude is at $108, with an unusually wide spread between the two.  Gas prices have risen from $2.90 per gallon at the end of February to $3.98 today.  Once a tipping point is reached, consumers will cut back on spending on other goods and services.  The conflict with Iran and uncertainty about oil and gas prices took stocks and commodities off their recent highs, set early in the quarter.  (DJIA 50,000; S&P 7,000; Nasdaq 23,000; gold 5,500; and silver 120).  But figure this one out- the dollar index, DXY, is back close to Par at 99.24, up from 96.45, which was the recent low in January.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- The Conference Board indicator was down again in January by -.1%, following December at -.2%, and November at -.3%.  The index has been negative for 40 of the past 44 months (no change in July 2025, May 2025, November 2024, and March 2024), signaling a recession that never came.  It’s not the only once reliable indicator to “fail” as no recession followed.  The inverted yield curves of 2022 to 2024 pointed to recession, too.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.0% for 1Q26, following a weak 4Q25 reading of +.7%, and full year 2025 of +2.2%.  Major world economies are also weak.  China just lowered its GDP projection to 4%-5% this year, which is the lowest since 1991, due to weak consumer demand, high debt, real estate crisis, tariffs, and an aging population.  It all sounds so familiar.  The economies in Japan, Germany, and the UK are no better.

Moody’s Beige Book Index-  An improvement in the districts occurred in March’s report, with the index at 16.7, following January 5.6, December 11.1, October 13.9, and September 0.

M2 Money Supply- February saw a mini-surge in M2 at +4.9% year-over-year, probably due to the Fed’s cognitive dissonance of not lowering interest rates.  January was +4.3%, December was +4.2%, and November was +3.9%.  The velocity of money ticked up to 1.41 in 4Q25 and 3Q25 from 1.39 in 2Q25 and 1Q25, boding well for GDP growth.  (Remember GDP=M x V).

Inflation- I was very excited by the February CPI report, which was +2.4% y-o-y and the core was +2.5%, both at the implied Fed target.  But the subsequent releases dampened my enthusiasm.  PPI came in very hot and very nasty at +3.4% y-o-y and the core was +3.9%.  PCE (upon which the Fed targets are based) for January was +2.8% and the core was +3.1%.  What gives?  PCE is greater than CPI?

CPI vs PCE- What’s Going On?

When February’s CPI was released, many business writers and talking heads complained that inflation was above target.  Well, for the first time since May, 2025, CPI did hit its implied target versus PCE.  Treasuries celebrated when no one else would, with the 2-year yield down to 3.41% and the 10-year yield down to 4.05%.  As I have written ad nauseum, Fed policy targets are set using PCE, which generally runs 50 basis points less than CPI because of the inclusion in PCE of substitution effects.  Since 2010, CPI has averaged 3.0% per year and PCE averaged 2.48%.  The spread between them showed about 50 basis points, as expected.  CPI hitting target in February probably won’t matter now as energy prices have risen substantially with the Iran conflict.

January’s PCE report came out with the y-o-y changes above 3%, higher than CPI.  The indices are constructed differently, with price effects of goods and services at different proportions.  CPI is down due to housing costs and rents dropping a lot over the past six months.  Rents are now at a 4-year low of $1,353 per month and are down -1.4% y-o-y.  PCE has a lower percentage of housing costs and also a higher percentage of other service costs rather than goods.  It may take some time for CPI and PCE to revert to their average relationship.

Private Credit Crisis Brewing?

Jamie Dimon sounded the alarm months ago when JPM Chase took charge-offs of private credit company (non-bank) loans and restricted new lending to them.  The $1.8 trillion market is comprised of many loans to private credit companies to make their loans; the loans are contained in funds managed by Blackrock, Goldman Sachs, T Rowe Price, Blue Owl Capital, Morgan Stanley, KKR, Apollo, and others.  They have restricted withdrawals from funds to no more than 5% in many cases as investors unsuccessfully scrambled to pull their money.  Liquidity crisis anyone?  It certainly bears watching.

Ending a Wild Quarter

Venezuela, Iran, and Cuba were not anticipated before this year began.  It shows how quickly things can change.  Other notables in the first quarter:

-          Independent journalist, Nick Shirley, exposed massive fraud in Minnesota regarding shell day care and healthcare companies throughout Minneapolis to the tune of $9 billion.  This led to probes expanding from Minnesota to California, Ohio, Maine, and New York.

-          The polar vortex finally ended!  March had some warm days.

-          The Cinderella story of the 16-0 Indiana Hoosiers had a happy ending with their NCAA championship victory over Miami  27-21.  I thought it was more exciting than the Super Bowl.

-          The Supreme Court ruled that the tariffs imposed by President Trump were not legal using the 1977 IEPPA law.  But tariffs can be placed using other existing laws and these laws were detailed in the ruling.  So, the markets really didn’t care.

-          New highs were reached in stocks, gold, and silver but volatility returned with a vengeance and prices all fell back.  Just ask bonds.

-          And congratulations to Giorgia Meloni and the entire Italian team for putting on a great Winter Olympics.  Giorgia, we will see you this summer…

 

Thanks for reading!  As always, I appreciate your support!  DLJ 03/24/26

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.

Guest Post: Financial Markets and Economic Update Fourth Quarter 2025

I had the best fourth quarter!  I’ve always wanted to visit Europe’s Christmas Markets and finally did in late November to early December on a Viking River Cruise from Budapest to Regensburg.  We loved Budapest, especially with both sides of the Danube River lit up at night.  We loved the Christmas Markets, especially in Budapest, Vienna, and Salzburg.  The best mulled wine was in Salzburg, which is an amazing city close to the Alps with so much culture and history.  The best food was in Regensburg.  It was special to sail from place to place, exploring, learning, shopping at Markets, listening to concerts, and enjoying every day.  For me, it is a dream come true and was actually a retirement gift, booked over two years ago.

Government Shutdown

We all saw it coming.  The government shut down on October 1^st when the Senate could not get 60 votes to get a continuing resolution passed.  Whatever happened to annual budgets, I’ll never know.  We keep pushing the current spending levels ahead by a few months.  Democrats first demanded $1.5 trillion in additional spending, including extension of Obamacare subsidies, which they themselves allowed to expire at the end of this year, but the Republicans held firm.  No.  Finally, in November, eight Democrats crossed the aisle to get to the 60 votes needed to pass the continuing resolution and reopen government, but with a near-term expiration of January 30^th.  It was the longest shutdown in history at 43 days.

So, we get to go through this madness again?  Government employees not getting paid, air traffic controllers not coming to work consistently, SNAP or food stamp benefits delayed, and government economic data suspended were all big negatives.  Republicans are not going to fund insurance companies in the failed Obamacare ACA anymore, they will not extend covid subsidies (covid is over!), and they will no longer pay for illegal immigrants. 

During the shutdown, NASA was busy tracking 3I Atlas, which they call a “comet” streaking across our solar system.  Is it a comet?  Is it an alien spacecraft?  Today, it makes its closest pass to Earth, albeit several hundred million miles away.  We shall see if the ETs send us a message.

Inflation

CPI for November surprised to the downside at +2.7% year-over-year; the core CPI was +2.6%.  CPI typically runs about .50% higher than PCE, upon which the Fed targets are set.  CPI is almost there to its implied target of +2.5%.  However, we only have PCE figures from September, which were +2.8% for the headline and core measures. 

There are plenty of hopeful signs that inflation will be declining in 2026.  Crude oil has fallen from nearly $80 per barrel to $55 this year.  Gas prices broke below $3.00 to $2.90 per gallon now.  Large increases in owners equivalent rent are fading, mainly due to deportations of illegal immigrants.  There is room for improvement in electric and natural gas prices, which rose +4.2% y-o-y, as capacity increases and regulations are reduced.  Food prices are tempering; one example is the cost of a Thanksgiving dinner in 2025 fell -5.2% from 2024 to $55.18.

Affordability is the big political buzzword right now.  The past four years brought us the highest inflation in two generations, from explosive government spending, supply chain issues, and a slow reacting Fed that fueled a spike in the CPI index of +20% between 2021 and 2024.  Expect CPI to continue its decline in annual pace, but it will be difficult to overcome the 20% increase in the level of CPI without deflation.  Focusing on growing real wages will certainly help with affordability.

Housing

Housing inflation is clearly down in this struggling sector.  Recent reports show y-o-y price increases diminishing, including the S&P/Case Shiller at +1.4% in September, FHFA at +1.7%, Moody’s at +2.0%, and existing home median sales prices at +1.2%.  Zillow reports that 53% of homes nationally have lost value in the year ended October, 2025, which is the highest percentage increase since April, 2012.  Prices in the Northeast are stable.  There’s a slowdown in demand, with existing home sales up only +.5% in November.  Inventories remain an issue with scarce supply at 4.2 months’ worth of sales.

Mortgage rates continue their painfully slow decline, with the 30-year rate at 6.21% according to FHLMC.  Monthly mortgage payments are still unaffordable for many potential buyers.  Property taxes in many counties are rising along with prices, and in many cases along with declines in value, adding to the angst of existing and potential homeowners.  Due to the government shutdown, new home sales data is delayed.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator was released for September and the trend continued to be negative, with September and August each at -.3%, leaving the index at 98.3 (2016=100).  For 36 of the last 40 months, the index has been negative.  Four months registered no change:  July, 2025, May, 2025, November, 2024, and March, 2024.  There was once a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.  So what are we to make of this index falling for over three years, continually signaling a recession that never came?   By the way, the yield curve inversion lasted for years, also signaling a recession.  With Federal Reserve easing, $10 trillion of new investment in manufacturing in the US committed, strong stock markets and earnings prospects, and fiscal stimulus in 2026, I don’t see recession coming soon.

Employment- Job growth has been showing weakness for months.  I can’t help but wonder how much of the decline in payrolls is related to deportations/immigration and cuts in government jobs.  Payrolls rose in November by +64,000, fell in October by -105,000, and rose in September by +108,000.  The unemployment rate rose to 4.6% in November from 4.4% in September.  A bad sign is that the pool of available workers is pushing 14 million, currently at 13.967 million.  Job openings are high in October at 7.67 million.  Quit rates fell below 2.0% to 1.8%, possibly showing workers unease about leaving jobs.  Challenger layoffs averaged 92,820 for the three months ended in November.  Wages rose +3.5% y-o-y in November; real wages have been positive for months.

Real GDP-  We have not received 3Q25 data yet, but the Atlanta Fed GDP Now projection is for +3.5%, following +3.8% in 2Q25, and -.6% in 1Q25.  Imports and inventories distorted both 1Q25 and 2Q25, as companies tried to get ahead of tariffs.  Real final sales strengthened to +2.9% in 2Q25 from +1.9% in 1Q25.  For the first time in a long time, the budget deficit is expected to decline as a percentage of GDP which will be slightly negative to growth.  Final tax changes from the OBBB include accelerated depreciation deductions for business investment and this will improve real GDP.  We are still held back by $38 trillion of US government debt, which is 126% of GDP; if greater than 90% for an extended time (since 2009), real GDP is impaired by about one-third.

Productivity- The talk is all AI, all the time.  Yes, AI will increase productivity and efficiency.  GDP can grow strongly without creating inflation if productivity is also strong.  (We witnessed this in the 1990s).  2Q25 productivity was +3.3% after a decline of -1.8% in 1Q25.  Capacity utilization is recently low at 77.4%, so we can afford to increase productive capacity without inflation.  And remember, if productivity meets its long-term average of +3.5%, employers are amenable to passing on 1.5% of it plus an inflation target of 2.0% for total raise of +3.5% without inflationary impacts.

Moody’s Beige Book Index- The index remained positive again in November at 11.1, following October of 13.9 and September at 0.  There were negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed four districts increasing modestly, three with no change, and five in decline, including Philadelphia.

M2 Money Supply- M2 continues its upward growth trend at a steady clip on a y-o-y basis, with October at +4.6%, September at +4.5%, August at 4.4%, and year-to-date through October at +4.1%.  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.  The velocity of M2 remains at 1.39 for both 1Q25 and 2Q25.  Expect M2 to continue to rise as QT has now ended.

Fed Actions

Another meeting, another rate cut.  That’s three in a row since September for a total easing of .75%, bringing Fed Funds to 3.50% to 3.75%.  The FOMC must have heard my criticism of their anemic GDP projections in September.  They now have raised their GDP projection to +2.3% in 2026.  But, true to form, they project taking two years to reach their inflation targets.  It’s always two years away!  It’s ridiculous!  Thankfully, Powell’s departure is not two years away.  I held to my pledge not to watch his press conferences in October or December and not to watch his BS, doublespeak, and “fog” worries ever again.  This is the same man I called a hero during the covid pandemic but his handling of inflation, QE and QT, and money supply turned me off for good.

The Fed finally ended QT on December 1^st.  They caused trouble in the money markets again by stubbornly refusing to ease enough.  Bank reserves are falling and there was great pressure on short-term funding rates.  SOFR was consistently above the IOR rate.  At the December meeting, they announced they will buy T-Bills as needed to help liquidity in the money markets; first up $40 billion of purchases.

The real Fed Funds rate is now about 1.00% (3.75% less PCE 2.8%).  There’s room to cut more.  Many economists estimate that the neutral rate for Fed Funds is 2.50% to 3.00%.

Year-End

We are almost there!  It will be Christmas before you know it!  We made it through a quarter where we saw:

•            On October 19^th, thieves stole $100 million in jewels from the Louvre
•            Jamie Dimon talking about cockroaches and loan losses
•            On November 12^th, the Philadelphia Mint produced the last penny.  It cost 4 cents to produce 1 cent.
•            A record government shutdown from October 1^st to November 13^th
•            Winter starting early with a snowstorm on December 14^th
•            The navigation of 3I Atlas throughout our solar system
•            Dorothy’s navigation of the Danube River

I wish you and your friends and families a Merry Christmas and a Happy New Year 2026!

I appreciate your support!  Thanks for reading!  DLJ 12/19/25

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. 

Guest Post: Financial Markets and Economic Update Third Quarter 2025

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 5^th 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.

Stocks continue their upward climb.  Bonds are rallying despite the bond vigilantes’ best efforts.  The Phillies clinched the National League East for a second consecutive year last week and our hopes are alive again.  And on Sunday, the Eagles pulled off another comeback miracle to beat the Rams as, with two seconds left, Jordan Davis blocked a field goal, picked up the ball, and ran down the field to score a touchdown.  OMG!  As Merrill screamed, “Game Over!”

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 17^th.  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 17^th.  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.

Guest Post: Financial Markets and Economic Update-Second Quarter 2025

The second quarter of 2025 has been full of drama and lots of rain in southeastern PA.  We’ve arrived at the start of summer and a 100-degree heat wave after witnessing a stock market meltdown over tariffs and a subsequent recovery.  The bond market saw wild swings in Treasury yields and the return of the bond vigilantes.  We experienced lots of tariff news, wondering about the Federal Reserve, unrest in Los Angeles over ICE in a community already reeling from the Palisades fire in January, and most recently, bold targeted strikes by our military on nuclear sites in Iran.

Why Aren’t You Lowering Rates, Jerome?

We’ve been wondering… You told us repeatedly that you would lower interest rates before inflation gets to your target of 2.0% on PCE (personal consumption expenditures inflation index).  Well, we are inching closer with PCE at 2.3% in May.  You are now targeting tariffs as your reason for not easing.  You just projected real GDP at +1.4% to +1.6% for this year and next, which I guess you don’t see as “weak.”  You continually say you “don’t know” what the effect of tariffs will be, but you happily increased your inflation projection for 2025 to 3.0% and lowered your GDP growth projections to +1.4% in 2025, +1.6% in 2026, and +1.8% in 2027.  Is that slow growth for so long acceptable in any scenario?  You just stated that growth is “solid,” yet the June Beige Book report showed that 9 of your 12 districts show declining or flat growth, including the Philadelphia region with a modest decline.  The Moody’s Beige Book Index fell to a negative number in June for the first time I can remember; it fell to -5.6 from 19.4 in May.  Doesn’t that bother you?

Several analysts recently have questioned why the FOMC always votes 12-0, including your most recent June 18th decision to keep rates and QT (quantitative tightening) unchanged; i.e. you are all doing nothing.  I suppose this FOMC “dozen” will wait and watch as growth gets strangled by your unreasonably high Fed Funds policy rate, which is, by the way, tied for highest in the world!  Everyone else is easing!  At least you are no longer Phillips curvers as you project both inflation and unemployment to rise.  As Powell said: “The current stance of monetary policy (do nothing) leaves us well positioned to respond (do nothing) in a timely way (always very late).”  It’s gratifying that 3 Fed governors have come out since the June meeting saying they will support rate cuts.   

Some Indicator Favorites

Leading Economic Indicators (LEI) continue to be negative month after month, and the duration of these negative readings confounds me and others.  The LEI in May fell -.1% to 99, following April’s decline of -1.4%, and has been negative for 34 of the last 36 months (exceptions were March and November, 2024).  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.  Not anymore.

Real GDP was -.5% in 1Q25 and was impacted by a huge amount of imported goods purchases to get ahead of tariffs.  Without the negative impact of imports and inventory offsets, growth probably was about +2.0%.  Growth in 4Q24 was +2.4%.  The Atlanta Fed projects 2Q25 at +2.9% and the Fed’s June projection puts GDP at +1.4% for all of 2025; nominal growth will likely be below +4.0%.

Productivity had a terrible reading in 1Q25 at -1.5%, following +1.7% in 4Q24.  This harms the formula for acceptable wage growth that would not be inflationary: 2.0% inflation target plus +1.5% long-term productivity growth totaling +3.5%.  In May, year-over-year wage growth was +3.9%.

The labor market is showing signs of weakness.  The unemployment rate was 4.2% in May.  Payroll growth was only +139,000 while household growth fell -696,000.  The pool of available workers has risen to 13.228 million and the augmented unemployment rate was 7.5%.  Yikes!  Maestro just perked up!

The M2 money supply is supposed to grow at approximately the same pace as nominal GDP per Milton Friedman.  Nominal GDP was +3.2% in 1Q25 and was +4.8% in 4Q24.  M2 year-over-year growth was +4.5% in May, +4.4% in April, and +3.6% in December.  The Fed is finally catching up, after they allowed M2 growth to turn negative for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.  Is this worse than tariffs?  You bet!

Inflation

Inflation has been on the decline for the past several months, despite tariff fears.  For May (year-over-year), CPI was +2.4%, core CPI was +2.8%, PPI was +2.6%, PCE was +2.3%, and core PCE was +2.7%.  This leaves Fed Funds of 4.50% at a spread of +1.7% to 2.2% (the real rate- more below) above these inflation rates.  It sure looks like PCE of +2.3% is close to the target of +2.0% and CPI is slightly below its implied target of +2.5% (+.5% to PCE).  Still, the Fed will not ease. 

Why not?  PCE fell below +3.0% in October, 2023, when Fed Funds was 5.50%; this rate remained there until September, 2024, when the Fed suddenly eased by .50%.  We want to look at the real Fed Funds rate at equilibrium.  Currently, that real rate is Fed Funds of 4.50% less PCE of 2.3%, or 2.20% and the real rate using CPI of 2.4% is 2.10%.  Since 1970, Fed Funds has exceeded PCE by .60% and CPI by 1.00%, with a differential of .40% between the two inflation measures.  More recent studies put the differential at .50%, which is why I use an implied target for CPI of 2.5%.  Many economic researchers, including Taylor, place the real Fed Funds equilibrium rate at 1.00% to 2.00%.  Studies in 2014 put the equilibrium rate at 0.00% when GDP growth was lagging potential badly.

The Fed’s projected GDP in the next three years is well below potential, especially due to the effects of high government debt-to-GDP at 120.9% in 1Q25.  When this ratio is greater than 90% for an extended period of time, as it has been since 2009, growth will be harmed in relation to potential by one-third.  We can assume potential is +3.0% plus.  So why is the Fed above the real range of 1.00% to 2.00% and not closer to 0.00% to 1.00% when growth is so weak?  Coupled with continuing QT keeping higher yields on mortgage-backed securities, and thus mortgage rates, it’s hard to come up with an answer.  It seems that Powell and his FOMC dozen are late again…just as they were in September, 2024 when Fed Funds of 5.50% produced a real rate of 3.20% compared to PCE then of +2.3%.  A 3.00% real rate?  Given the lag in Fed policy of six to nine months, it makes sense that their tight policies have weakened growth now.

There are many reasons why inflation would fall rather than rise.  Falling energy costs and the shift back to fossil fuels will lower costs compared to expensive “green energy,” although we will see volatility in oil prices as we did last week with the Iran-Israel conflict.  The weaker economy, which could be exacerbated by tariffs affecting consumer and business spending, lower federal spending, restrictive Fed policy, and high government debt-to-GDP levels will all put downward pressure on inflation.

Stocks and Bonds Go Wild

We started the second quarter with President Trump’s “Liberation Day,” where he rolled out extremely high tariff rates for all countries.  These were quickly figured out to be trade deficits to total exports, not actual tariff rates.  But the shock was there on April 3rd and April 4th, which were two of the most horrible trading days in memory, with the DJIA down -9.5%, S&P 500 -10.8%, and Nasdaq -11.8%.  It was a pure-panic market collapse, not a crash, but we didn’t know this until later.  It seems all of Wall Street shorted the market, only to be whipsawed on April 9th by Trump’s announcement of a delay of 90 days in tariffs to allow for deals to be made, although he kept in place a minimum tariff of 10%.  The pause was recommended publicly by Jamie Dimon and Bill Ackman and Trump listened.  Short covering rallies are the most fun to watch, with the DJIA +8.0%, S&P 500 +9.5%, and Nasdaq +12.2%, which were some of the best trading days ever.  Volatility, or the VIX, peaked at 52%!  By May 13th, all of the price meltdown was recovered.  Today, June 27th, the S&P 500 and Nasdaq have recovered to above their all-time highs.

Bonds experienced volatility of their own during April and acted in their traditional role of being a flight-to-quality trade.  The 2-year Treasury hit a low of 3.54% on April 4th, went back up to touch 4.00%, and today is at 3.74%.  The 10-year Treasury hit a low of 4.14%, went back up to 4.57%, and today is at 4.28%.  Bond vigilantes woke up and began looking at the size of deficits, especially after Moody’s downgrade of the US credit rating from Aaa to Aa1 on May 16th; the vigilantes pushed the 10-year yield to 4.57% and the 30-year yield above 5.00% that day.  The problem is that Moody’s action comes 14 years after S&P took the same action on August 5, 2011 from AAA to AA+.  Perhaps the assorted calculations of the “One Big, Beautiful Bill’s” deficit size spooked the bond market.  It was passed by the House on May 22nd and sent onto the Senate. Some of the deficit will be offset by DOGE spending cuts of $160 billion.  Of course, the CBO “scoring” is typically suspect, not allowing for increased revenues.  Nonetheless, the vigilantes are watching, but despite their best efforts, rates are drifting lower.

Tariffs

Suddenly everyone’s a tariff expert.  I’ve seen some outrageous projections which seem skewed toward increased inflation.  But what if the tariffs affect spending enough to slow down growth?

The US has been experiencing large trade deficits, especially with China, for over 20 years.  President Trump pointed out that the US has suffered from unfair trade practices.  We charged tariffs of 2.7% on average in 2024 to other countries and they charged us 6.7% plus VAT taxes plus manipulated their currencies.  His goal is to wipe away the unfairness and increase tariff revenue without increasing inflation.  But clearly the uncertainty has rattled both stock and bond markets, not to mention the Fed.  The meltdown in stocks on April 3rd and 4th caused a decline in market capitalization of an estimated $6.4 trillion, which has since been recovered.  But why the huge reaction when US imports are $3.3 trillion, or only 14% of the economy.  Many trillions of dollars of commitments have been accepted by President Trump for domestic investments in manufacturing plants and equipment from companies all over the world.  Tariffs provide incentives for manufacturers to produce here in the US.

We are in the process of readjusting our economy to increase manufacturing and production here at home, using our natural resources- oil and gas domestically and minerals from the deal with Ukraine.  Tariffs are not generally inflationary as producers absorb some of the tariff costs and consumers can often substitute cheaper domestic goods for imported ones with tariffs.  The shades of the Smoot-Hawley Tariff Act of 1930, which raised tariffs from 13.5% to 20%, loomed over the markets before fading away.  If you want to argue about the 1930s, start with the Fed, who kept rates too high during those years and added to the severe decline in GDP.

Thank You, President Harker

I wanted to give a huge thank you to outgoing Philly Fed president, Pat Harker, who served our region better than any other Fed President, in my opinion.  I wish there was not a term limit.  I thank you for your wisdom, insights, and dedication to all of us who live and work here.  All the best to you!

Happy Events

April wasn’t all crazy.  We witnessed Rory McIlroy achieve the Grand Slam by winning the Masters on April 14th.  The Eagles visited the White House on April 28th as part of the national recognition of their great Super Bowl LIX win on February 9th.  For me, retirement is about happy times and we spent a few days at Hershey Park this month and this summer Paris is calling my name.  I will again climb the 350 steps to the Abbey at the top of Mont Saint Michel in Normandy.  I recommend that you also make plans for happy times!

I appreciate your support!  Thanks for reading!  DLJ 06/27/25

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.

Guest Post: Financial Markets and Economic Update-First Quarter 2025

- By Dorothy Jaworski

We made it through the long, cold winter.  There were days it was so cold I did not want to leave my house.  Even President Trump’s inauguration on January 20^th was moved indoors to the Capitol Rotunda because of wintry temperatures.  We suffered through the cold but had very few snowstorms as they seemed plentiful south of Philadelphia and basically missed us.

The first quarter of 2025 was one of a lot of excitement- a glorious run to a Super Bowl win by the Eagles, a new President and his whirlwind actions, an AI surprise from China, on and off again tariffs, a boring Fed, DOGE and government spending cuts, imaginary inflation fears, and stock market drama.  On the horrible side, Los Angeles experienced its worst wildfires ever in January, which destroyed 16,300 buildings, including 13,000 homes, killed 29 people, and displaced 80,000 in the Pacific Palisades and Eaton fires.

Undoubtedly, the Eagles 40-22 win over the Chiefs in the Super Bowl was the highlight of the quarter.  The excitement built with every playoff game and the Eagles performed at a high level.  Acquiring Saquon Barkley changed this team.  Jalen Hurts, the O-line, and receivers AJ, Devonta, and Dallas outperformed, and we owe much respect to the defense!  An estimated 1.5 million fans turned out for the parade.  As Nick Sirianni said, “You can’t be great without the greatness of others.”  Now, all eyes turn to the Phillies.  A long, hot summer will determine if they can challenge the World Series LA Dodgers for MLB’s crown this fall.

Stocks and Bonds

It feels like we’ve been on a roller coaster when it comes to the markets this quarter.  We rallied for much of January until the 27^th, when we received the DeepSeek AI announcement that a Chinese firm developed their own AI model for $6 million.  What?  Not billion?  It was chaos in the tech sector.  Nvidia and Broadcom, known for their AI chips, each fell -17% for the day, with market cap losses of -$587 billion and -$195 billion, respectively.  It’s estimated the whole AI market lost $1 trillion that day.  If China could develop technology so cheaply, why would our companies spend billions of dollars?  In a wild frenzy, millions of people downloaded DeepSeek AI.  They didn’t learn from TikTok?    Well, it wasn’t long before we discovered the truth; Microsoft reported that DeepSeek was copied from Open AI’s ChatGPT through improper use of an Open AI distillation tool.  The intellectual theft by China continues.  The markets soon recovered a lot of the losses.

Prices at the end of January seemed to hold up pretty well, but volatility and sell-offs took over in February and especially March.  In those two months, the DJIA fell -6.6%, the S&P 500 fell – 7.6%, and the Nasdaq fell -11.7%.  Gone are the new handles I wrote about last quarter: DJIA 45,000, S&P 6,000, and Nasdaq 20,000.  The media narrative turned to trashing tariffs and daily claims of recession and inflation that have rocked the markets.  I will discuss tariffs shortly.

Bonds rallied overall during the quarter with yields on the 2-year to 10-year Treasuries falling by -28 to -33 basis points.  Yields spiked in January, with the 10-year reaching 4.81%, before falling to around 4.25% now.  The yield curve briefly inverted again at the end of February (10-year minus 2-year) at – 8 bps but since has returned to positive at +34 bps.  The 10-year to 3-month spread is generally flat.  By the way, gold has rallied to new highs at $3,085 per ounce, up an astounding +42.6% in the past year, oil prices are at $69 per barrel, down -16.5% from last year, while AAA gas prices are at $3.16 per gallon, down -10.7% from last year.  Let the energy price declines begin.

 

Trump and Policies

Rarely have we seen a Presidency start off with so much action.  President Trump and his Cabinet have worked quickly to enact his policies and campaign promises on stopping illegal immigration, securing the border, and deportations, lowering income taxes for individuals and businesses, reducing prices, examining and cutting government spending and staff in every agency, with DOGE doing the analyses for the departments.  (To date, DOGE has identified $130 billion of savings and cuts, with a goal of many times this amount),  Other policies include enacting tariffs- both as a negotiating tool and to increase revenue to equalize the trading with other countries, using our massive oil and gas reserves to increase energy production, improving economic growth, and working to end the endless wars in Ukraine and Gaza.

So far, he has had success on the border and on the business side- securing almost $2.8 trillion of commitments from large US and foreign corporations to build and manufacture products here in the US over the next few years.  Oil and gas drilling is back and new leases are being sold once again.  Trump feels that lowering energy prices can have a cascading effect to lower prices of almost all goods.  Growing the economy, increasing private sector jobs, not government ones, and increasing real wages are top goals.

Tariffs and Taxes

The media also developed a recession narrative during the first quarter, even though few, if any, corporations mentioned recession during their first quarter earnings calls.  But suddenly it’s a big narrative.  The Fed played into this with their quarterly projections in March and lowered their GDP projections to +1.7% to +1.8% in 2025 and 2026, respectively, from above +2.0% in the prior projections in December.  Yet they are only lowering rates twice this year- the same as their last projection?  The Atlanta Fed GDP Now estimate for the first quarter was -2.8% as of March 28^th, even though they admit the estimate is not incorporating foreign trades of gold properly.  Be careful what you wish for; recessions are often self-fulfilling prophecies.  It’s ridiculous. 

The tariff situation has been very volatile since Trump first started announcing them in February.  He used some as negotiating leverage, some to protect US industry (autos), and some to level the playing field with reciprocal tariffs to just make trade fair.  The media narrative is that tariffs are inflationary.  I disagree.  If spending occurs on products with higher tariffs with higher prices, then less spending will occur on other goods with lower or no tariffs and those other goods’ prices will fall.  Prices tend to adjust throughout the economy.  If high tariffs depress demand, those manufacturers likely will lower prices.  Of consumers’ purchases currently, about 15% is on imported goods.  The Fed and NBER both studied the effect of Trump’s first term tariffs and found no effect on inflation, which continued to run below the Fed’s target of 2.0% then.  Tariffs do not cause inflation; as Milton Friedman taught us, “inflation is always and everywhere a monetary phenomenon.”  Even Chairman Powell knows this and called the effects of tariffs “transitory.”  (oh, no, not that word again!).  Despite knowing the results of studies on tariffs, he said he was “uncertain” of their impact.  Guests on Bloomberg guests on the day of the Powell press conference said “Why are we hanging on every word Powell says, when he keeps saying he doesn’t know?” 

Bur mark my words, once Congress passes the large tax bill making the Trump tax cuts of 2017 permanent, increasing the SALT deduction cap, lowering the corporate tax rate from 21% to 15%, putting in business deductions for accelerated depreciation, lowering individuals’ tax brackets, and including no tax on social security, tips, and overtime, the narrative about recession will quickly disappear. 

What About Other Indicators?

Here are some of my favorite indicators; watch them and you will know what’s happening:

-      Leading economic indicators, or LEI, continue to be weak.  February was -.3%, January was -.2%, and December was -.1%.  Of the past 33 months, only two were positive:  March, 2024 and November, 2024.  The Conference Board restated the index with benchmark revisions and it’s back above 100 (2016 levels) at 101.1 in February.  No surprise here.

-         Real GDP was +2.4% in 4Q24 with nominal GDP at +4.8%.  Real GDI was +4.5%; the average of GDP and GDI was +3.5%.  As mentioned earlier, the Atlanta Fed GDP Now 1Q projection number is -2.8%.  They publish it even though they state they are not including foreign trade in gold correctly.

-   M2 year-over-year growth in both February and January was +3.9% and December was +3.8%.  Friedman taught us that growth in the money supply should approximate nominal GDP growth, which is currently at +4.8%.  They are catching up and this is probably why they are cutting back on QT, their bond selling program.  After a period of decline in y-o-y M2 from December, 2022 to February, 2024, M2 growth has steadily ramped up.

-     Inflation.  Here’s the rundown.  It’s not so terrible.  PCE 4Q24 +2.4%, core PCE 4Q24 +2.6%, PCE February +2.5%. core PCE February +2.8%, CPI February +2.8%, PPI February +3.2%.  The Fed target of +2.0% is on headline PCE; CPI is +.5% higher with +2.5% as an implied target.  The 5-year Treasury Tips spread is 2.67%; the 10-year TIPS spread is 2.38%.  The final March survey of the University of Michigan showed the 5-year inflation expectation was +5.0%, but sorry, they are wrong.

-     Unemployment.  The BLS benchmark revision reduced -589,000 from reported jobs in 2024, not the original -818,000 projected last August.  The unemployment rate was 4.1% in February compared to 4.0% in January.  Unemployed persons are 7,052,000 and the pool of available workers is 12,945,000; both have been on the rise in recent months.

-        The Fed has been boring lately.  We know they are afraid to change rates, even though Powell says they are “meaningfully restrictive.”  The Fed is uncertain what tariffs will do, uncertain what inflation will be (their projections from March are outrageous- they do not hit the 2.0% PCE target until 2027!  What?!), uncertain what GDP will do (of course, they lowered it below +2.0%).  Powell kept saying they are “uncertain.” “it’s hard to tell,” “they just don’t know,” and “we’ll see what happens.”  Wow…where does that leave the rest of us?

I feel like I’ve gone on longer than usual this quarter, so I’ll wrap it up here.  I just got back from a wonderful week with great friends in Palm Beach County, Florida.  Sorry, we had no Trump sightings.  I’m looking forward to more traveling in the second half of this year.  Isn’t that what retirement is all about?  Stay tuned!

I appreciate your support!  Thanks for reading!  DLJ 03/28/25

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 all of your comments.