The Guns of August*

One hundred and eleven years ago the guns of August opened fire signaling the start of World War I. Although far from being deadly, the July employment report reeked carnage on the stock market with the S&P 500 declining by 1.6% on Friday while the bond market sustained a massive rally with the 2-year note yields declining by 27 basis points and 10-year yields declining by 14 basis points. The markets are clearly sniffing out a recession.

 

Nonfarm payrolls increased by a meagre 73,000 jobs, but what really spooked the markets was a gigantic downward revision of 258,000 jobs for May and June. Further, all of the gain can be accounted for by healthcare and social services, hardly growth drivers. The three-month average for employment gains of 35,000 jobs is indicative of a stalled labor market. The far more volatile household survey was much worse with the average monthly decline from May to July of 287,000 jobs. My guess is that the administration’s immigration raids are now taking their toll on the job market. The labor market is experiencing simultaneous demand and supply shocks.

 

In March I called for the recession of 2025 to begin in the second quarter. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) That obviously didn’t pan out, but with real final domestic demand growing at only 1.2% in the second quarter and the job market stalling out, it was pretty close to a recession.

 

The day before the employment data came out, President Trump announced a panoply of tariffs on a host of countries that have failed to make a deal with him. Those tariffs and the earlier ones announced for the E.U. and Japan means that the U.S average tariff rate is now about 19%, eight times above where we stared the year. Simply put, Trump called the market’s bluff on the TACO trade an eventuality we noted in June. (See: https://shulmaven.blogspot.com/2025/06/stocks-too-complacent-about-taco-trade.html )

 

As a result, with Trump’s tariffs now baked into the cake and with a stalled job market, the U.S. economy is on course for stagflation. The tariffs will keep inflation as measured by the core price indices above 3% and that will put the Fed between a rock and a hard place, especially because the unemployment rate will remain well contained, at least for now.

 

Adding insult to injury President Trump fired BLS Commissioner Erika McEntarfer because he didn’t like the revisions to the employment data. His big, beautiful economy is not as beautiful as he thought. This banana republic move will lower the market’s confidence in future data coming out for the government’s data mills, not a good thing.

 

Lastly, I have been skeptical of the stock market’s big rally off the April lows. (See: https://shulmaven.blogspot.com/2025/06/my-ucla-anderson-forecast-presentation.html ) My sense is that this skepticism will soon be justified.

*- With apologies to Barbara Tuchman