The Job Market Is Strong, Inflation Is Too Fast, and the Government Is Bananas
The current U.S. administration is determined to squander the benign conditions it inherited. Federal Reserve officials were wise to avoid adjusting policy.
The U.S. economy slowed in the first half of 2025, but not enough to raise the unemployment rate, hit wage growth, or make a dent in the (worsening) inflation picture. This is not a crisis, even if the situation is marginally worse than at the end of 2024.
The administration’s response, however, is a crisis.
Besides the ongoing attempt to suborn the Federal Reserve, which would be bad enough on its own, the big brains in the White House decided to fire the commissioner of the Bureau of Labor Statistics (BLS) on August 1, shortly after the publication of the jobs data for July. The BLS is in charge of collecting some of the most important economic data in the U.S., including figures on inflation, employment, and wages. As with his hamfisted efforts to pressure the Fed, Trump’s actions on the BLS resemble what an unsubtle Nixon impersonator would try to do.
The move comes several months after the administration decided to abolish the Federal Economic Statistics Advisory Committee (FESAC), which brought in outside experts from academia and the financial industry to assist the BLS, the Census Bureau, and the Bureau of Economic Analysis (BEA) with ideas for how to improve the government’s data collection efforts. As I noted at the time it was announced, “This is the kind of thing one might do as a first step towards imposing political control over the collection and dissemination of official statistics”. Even before the current administration came into office, the BLS, Census, and BEA were already under strain from years of budget cuts that hampered their ability to collect and produce information. This was exacerbated by the layoffs imposed earlier this year.
Reliable, timely, detailed data are public goods, and should be supported accordingly. Unfortunately, the quality of the data—and, just as importantly, public trust in the quality of the data—is being threatened by the administration’s efforts.
The irony is that the most recent jobs numbers were basically fine. While the growth rate in the number of workers on employers’ payrolls has slowed sharply, with the gains in May and June revised down by an unusually large amount, that by itself means relatively little. Other indicators look much healthier. Even the reported slowdown in the growth rate of the volume of goods and services produced in the U.S. (GDP) in 2025H1 relative to 2023-2024—some of which may be noise attributable to the undercounting of inventories accumulated in anticipation of tariffs—is less reflective of the macro situation than might appear at first glance. In both cases, the changes in immigration policies over the past 18 months are likely playing a large role.
The bigger worry is that there has been little to no progress on inflation over the past 18-24 months, and that this was true even before tariffs started showing up in the data. While the direct impact of tariffs is limited by the fact that imported goods are only a small part of the total U.S. consumption basket, the indirect effects could be larger and longer-lasting as shell-shocked households and businesses are forced to deal with yet another set of arbitrary price spikes so soon after the pandemic and the Russian invasion of Ukraine.
Given this backdrop, Federal Reserve officials were wise to avoid prematurely adjusting interest rates.1 While it is normally the case that tax increases that sap the private sector’s spending power (such as the tariffs) should be offset with looser monetary policy, there are good reasons to avoid doing that now.
A few highlights from what follows:
The change in net immigration has been massive and could explain most if not all of the observed slowdown in aggregate real growth rates and payroll employment.
The GDP numbers are still heavily distorted by businesses’ and consumers’ efforts to get in front of the tariffs, as well as potential measurement issues with pharmaceutical inventories.
Headline inflation has been remarkably stable for a while, although the split between goods and services has shifted somewhat.
Most Fed officials are well aware of these dynamics.