The latest on economic data, tariffs and AI trends.
Do you remember the story of “Goldilocks and the Three Bears”? A young girl enters the home of a family of bears while they are out for a walk. She samples their porridge, sits in their chairs, and tries out their beds. She finds each bear’s belongings either too hot, too cold, too hard, too soft or simply not right until she finds the “just right” item that belongs to Baby Bear.
I was thinking about this fairy tale after multiple Federal Reserve governors made comments this week deeming policy “too tight” and “too loose” simultaneously. Chair Jerome Powell also added to the conversation. Speaking at the Greater Providence Chamber of Commerce 2025 Economic Outlook Luncheon in Rhode Island, Powell outlined the challenges the Fed is facing with inflation risks tilted to the upside and risks to employment to the downside. He repeated his view that “there is no risk-free path.”
While Chair Powell did not necessarily advocate for a more dovish or more hawkish policy path, nor did he provide any specific comments about his view regarding the timing or number of potential future rate cuts, he noted that he sees the current policy stance as “modestly restrictive.” As such, this leaves the Fed, he said, “well positioned to respond to potential economic developments” in either direction.
Our version of the Goldilocks “just right” strategy seems as though it must come from the Fed perfectly threading the needle of monetary policy. But that is harder than it may appear. As deft as the Fed was responding to the 2008 Great Recession financial crisis, they whiffed post-COVID when they misjudged the invasive impacts of inflation, deeming price increases as only “transitory” when they were anything but.
Add into the porridge other changes coming from Washington related to tariffs. U.S. President Donald Trump announced a new wave of tariffs this week, including a 100% levy on branded or patented drug imports starting Oct. 1 unless a company is building a factory in the U.S. The president said he will also impose a 25% import tax on all heavy-duty trucks and 50% levies on kitchen and bathroom cabinets. The news was confusing, especially on pharmaceuticals, as recent trade deals with Japan, the EU and the UK include provisions that cap tariffs for specific products like pharmaceuticals at 15%. There also appears to be an exemption for those companies with U.S. manufacturing plants.
Markets remain nonplussed by these announcements, and by the president’s recent speech to the United Nations and countries around the world. During the nearly hour-long address, Trump admonished the U.N. over what he views as its ineffectiveness. He said some countries “are going to hell” over their immigration policies, and he blasted climate change as “the greatest con job ever perpetrated on the world.” Trump proudly described the U.S. economy as thriving under his leadership, saying that energy prices are down (they were up year over year in August), food costs are down (also up from 2024) and mortgage rates are down (this is true). The only thing going up, he noted, is the stock market.
The stock market’s rise was stymied a bit this week, ironically by good economic data. After two months of declines, August durable orders grew 2.9% month over month, which was much better than the projected 0.3% decline. Transportation was a big winner, rising 7.9%. Aircraft spending rose, with defensive aircraft and parts booming 50.1% and nondefense orders rising 21.6%. Both initial claims and continuing jobless claims came in lower than expected.
The third report of Q2 U.S. GDP growth was 3.8%, well above the previous estimate of 3.3%, marking the strongest performance since the third quarter of 2023. Revisions included a big rise in net exports and consumer spending. New home sales unexpectedly jumped 20.5% in August, the highest since January 2022, though existing home sales continue to be hampered by high mortgage rates and high prices. The PCE inflation metric rose 2.7% year over year, while the core PCE was up 2.9%, higher than the Fed’s target level but not higher than expected, which was welcome news to investors.
Even with some modest losses, the stock market remains near all-time highs after a ferocious increase from the April 2025 tariff-induced drop. Strong earnings and AI euphoria have fueled those increases. These factors will likely be the primary focus for the financial markets, as shifting policy in Washington and even the Fed’s balancing act are not enough to be a major catalyst to the upside.
This week, however, air leaked out of the AI balloon for some market darlings when management consultant Bain & Co. published a report showing only modest productivity boosts of 10% to 15% from generative AI adoption. The report showed that the spending requirements for data centers and related infrastructure is likely to fall short of tech companies’ ability to monetize services like ChatGPT by some $800 billion. Legendary hedge fund investor David Einhorn warned that the hundreds of billions of spending earmarked for AI infrastructure may demolish enormous amounts of capital, even if the technology transforms society.
We share those concerns about the AI spend, especially given the run-up in stock prices for those companies. With that, we continue to push to prudently diversify and take profits in accordance with your long-term financial plan, your target asset allocation and your tax management goals. We believe it would be better to get your portfolio “just right” before the market rebalances for you.
Written by a human.