Economic and Market Environment

The Four Pillars of the U.S. Economy

Overall, the economy is performing well in the face of significant uncertainties.

• The first negative quarter of GDP since 2022 occurred because:
• Imports surged in anticipation of tariffs, negatively impacting GDP.
• Consumption also slowed as consumers and businesses cut back in response to uncertainty.
• Inventories swelled, as a result of imports, also in anticipation of higher prices due to tariffs.
• Indications are that second quarter GDP is returning to normal with less tariff impact.
• This negative GDP quarter should not be alarming due to the unusual nature of the various components.

• Wages for workers have grown by 4.2% over the last year, a higher rate than inflation at 2.4%.
• This is a positive contributor to economic growth, and real incomes provide the wherewithal to consume more.
• Since consumption is some 70% of GDP, a healthy consumer is essential to continued economic growth. This illustrates the importance of keeping inflation low.

• The Trump tariffs represent a dramatic departure from normal economic practice.
• The 90-day freeze on reciprocal tariffs remains in effect until July 9. Tariffs of 10% across the board are expected to remain in place. There is considerable uncertainty over the eventual landing spot for the tariffs.
• Investors in stocks and bonds have voted decidedly on tariffs: they don’t like them. Tariffs are expected to cause slower growth and at least one-time higher inflation.

• Interest expense as a percent of total government expenditures is not a pretty picture. Interest expense is a nonproductive expenditure.
• Government dollars now spent on interest exceeds spending on defense. It is also nearly as large as spending on Social Security, Medicare, and Medicaid. This is a very unfavorable trend.
• Increased interest expense can come from two sources: higher levels of government debt and higher interest rates.
• Investor awareness of government debt and interest trends has been heightened by the introduction of the “Big Beautiful Bill” which promises to extend budget deficits, increase government debt, and increase interest payments. This is not a favorable long-term outlook.

• The U.S. dollar remains as the world’s reserve currency. However, it has been under pressure this year having declined by near 10% in the first half.
• The U.S. dollar can weaken as a result of large federal deficits. Foreign investors, noting the lack of fiscal probity, may lose their appetite for dollars.
• Shorter-term weakness in the dollar is not unusual. The chart above indicates considerable volatility as the dollar made its way higher over the last ten years.
• The U.S. dollar is not likely to be replaced as the reserve currency. There is no competitive currency that could unseat the dollar.

• The current valuation of stocks is high, and this has implications for future returns.
• These two charts highlight the importance of the starting point for future stock returns: the lower valuations are at the starting point of an investment, the greater future returns are likely to be.
• High valuations may be deserved at this time, reflecting bright future prospects for corporate America. However, investors may be well served by selectively choosing lower valuation issues that offer larger potential returns over time.
• These charts suggest a realistic appraisal of the potential future returns from stocks.
• Note the potential 10-year returns from a starting point in Crawford large cap strategies price to earnings ratio (P/E).

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