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By Dhaval Joshi of BCA Research

Executive Summary:

• The Fed will run the US economy hot – because, with labour demand and supply now in balance, both demand and supply must expand to keep output expanding.

• Short-term US real rates will come down further because the Fed will continue to cut even with inflation in the 2.5-3.5 percent range.

• The US dollar will continue to weaken, given the currency’s dependence on real interest rate differentials.

• The US yield curve will undergo a ‘bear steepening’ as US inflation expectations ratchet higher. Meaning, T-bonds will underperform cash, as well as other major sovereign bonds.

• Stocks will continue to outperform bonds.

• New tactical trade: Overweight MSCI ACW Consumer Discretionary versus Industrials.

Some Like It Hot

The US economy has reached a watershed. For the first time since the pandemic, labor demand and labor supply are in perfect balance, with both now standing at 172 million workers.

Labor supply equals the number of available workers: those with jobs plus those without jobs. Labor demand equals the number of people in work plus job vacancies plus workers on temporary layoff. Many people miss this last component of labor demand. Labor demand must include workers on temporary layoff because there is demand for these workers, albeit they are on temporary layoff for idiosyncratic reasons (such as a government shutdown).

Put a different but equivalent way, the labor market is balanced when the number of ‘jobs looking for workers’ (job vacancies) equals the number of ‘workers looking for jobs.’ The latter means the unemployed. But given that those on temporary layoff are not looking for jobs, it more correctly means the unemployed that are not on temporary layoff.

The number of job vacancies and the number of unemployed not on temporary layoff both now stand at 6.6 million workers

So, correctly measured either way, the US labor market is now in balance.

A Labor Market In Balance Means Double Jeopardy

The US labor market is in balance, but such a balance is extremely rare. In the normal state, that prevailed for decades prior to the pandemic, labor demand runs short of labor supply. Meaning the economy is demand-constrained. 

Since the pandemic though, in a highly unusual state, the relationship flipped. Labor supply has been running short of labor demand. Meaning the economy has been supply-constrained.

The distinction between demand-constrained and supply-constrained is crucial because it is the constraint on the economy – the lower of demand and supply – that drives economic output.

In a normal demand-constrained economy therefore, a demand recession causes a GDP recession. In a supply-constrained economy however, it takes a supply recession to cause a GDP recession. This explains why the abnormally supply-constrained US economy cheated a GDP recession when demand went into recession through 2023-24. The growth in the constraint – labor supply – kept output growing.

Now though, the US economy is at a watershed that puts it in ‘double jeopardy’. Given that labor demand and labor supply are in perfect balance, a drop in either would cause output to contract.

Put another way, both demand and supply must expand. To counter this double jeopardy, the Fed must run the economy hot.

Stimulate demand. But also stimulate supply by creating conditions for labor participation to rise – to offset the Immigration and Customs Enforcement (ICE) expulsions of (illegal) migrant workers.

Don’t Bet On An AI-Driven Productivity Surge

If the US labor market is back in the balance it was pre-pandemic, then why is US wage inflation still running hotter than pre-pandemic?

You might counter that the just-released Employment Cost Index (ECI) showed quarter-on-quarter wage inflation slowing to just 3 percent (annualized rate). Yet quarter-on-quarter wage inflation is highly volatile. More meaningful is the smoother 4-quarter wage inflation rate, running at 3.4 percent.

You might further counter that even 3.4 percent achieves the target of 3.5 percent wage inflation that several Fed governors have claimed is consistent with 2 percent price inflation.

Yet 3.5 percent ECI inflation is not consistent with 2 percent price inflation.

The very well-established relationship between ECI inflation and core PCE inflation tells us that, to be consistent with core PCE inflation at 2 percent, ECI inflation must be at 3 percent

Again, you might counter that such a 1 percent gap between ECI inflation and core PCE inflation implies that productivity growth is 1 percent, which is implausibly low. Yet while other more comprehensive measures of productivity growth may show a higher number, 1 percent is the well-established gap between these two specific datasets.

Finally, you might counter that even this specific 1 percent gap should widen if AI boosts productivity growth, allowing wage inflation to run hotter. Yet, despite much wishful thinking, the fact that the gap has not widened warns us that we should not bet on an AI-driven productivity surge as our base case.

The Warsh Fed Will Let The US Economy Run Hot

The reason that wage inflation has gapped structurally higher versus the jobs-workers gap is that the composition of the US labor market has structurally changed. As I highlighted in Why The World’s Fate Hangs On 2.5 Million Older American,  there are almost 3 million fewer older workers in the US labor supply now than before the pandemic.

The loss of millions of older workers is significant because many jobs are non-fungible by age. Just as older workers cannot do younger-aged jobs that require physical strength or athleticism, younger workers cannot do older-aged jobs that require decades of acquired skills or experience.

Therefore, the shortfall of older workers has created an additional tightness in the US labor market which is not captured in the aggregate jobs-workers gap. Once we account for this additional tightness, we get a near-perfect explanation for the evolution of US wage inflation. 

To repeat, faced with the double jeopardy of declining labor demand or declining labor supply, the Fed will turn a blind eye to this structural uplift in wage inflation. It will do this by de facto moving its inflation target to 2.5-3.5 percent. In effect, a Warsh-led Fed will let the US economy run hot.

There are several investment conclusions:

• Short-term US real rates will come down further because the Fed will continue to cut even with inflation in the 2.5-3.5 percent range.
• The US dollar will continue to weaken, given the currency’s dependence on real interest rate differentials.
• The US yield curve will undergo a ‘bear steepening’ as US inflation expectations ratchet higher. Meaning, T-bonds will underperform cash, as well as other major sovereign bonds.
• Stocks will continue to outperform bonds, as the Fed runs the US economy hot.

New Tactical Trade: Overweight Consumer Discretionary Versus Industrials

Consumer Discretionary has underperformed Industrials by almost 20 percent through the last 65 trading days. But the collapsed complexity  of this near-vertical underperformance suggests that the magnitude and pace is overdone.

The potential pivot could be the market warming to the US consumer, given the combined effect of ultra-low US real interest rates, fiscal stimulus, and a still-robust labour market.

Hence, in line with our thesis that the Fed will run the US economy hot, and given the stark underperformance of Consumer Discretionary, a new tactical trade is to go overweight MSCI ACW Consumer Discretionary versus Industrials.

Set the profit target/stop-loss at +/-10 percent, and trade expiry on March 25th.

Ahead of today’s jobs report, we warned that (another) massive negative revision was coming to the US labor market, predicting it would be “1 million plus.” We were right.

Recall that alongside today’s jobs report, the BLS would release its annual benchmark revision to the establishment survey and a methodological update to the birth-death model (as a reminder, the BLS’s preliminary estimate of the benchmark payrolls revision indicated that cumulative payroll growth between April 2024 and March 2025 would be revised 911k lower).

More importantly, the BLS would also update the net birth-death forecasts in the post-benchmark period (April 2025-December 2025) to incorporate information from the QCEW and the monthly payrolls survey. We said that a sharp downward revision to the post-benchmark period “appears likely”, reflecting the continued slowdown in the job growth measured by the QCEW and weak private payroll growth measured by the establishment survey during post-benchmark period, something we had been warning about for years. 

Sure enough, in its report today, the BLS announced that “the establishment survey data released today have been benchmarked to reflect comprehensive counts of payroll jobs for March 2025. These counts are derived principally from the Quarterly Census of Employment and Wages (QCEW), which counts jobs covered by the Unemployment Insurance (UI) tax system. The benchmark process results in revisions to not seasonally adjusted data from April 2024 forward. Seasonally adjusted data from January 2021 forward are subject to revision. In addition, data for some series prior to 2021, both seasonally adjusted and unadjusted, incorporate other revisions.”

And here is the summary table the BLS published to adjust for the revised Birth-Death model (there is much more data to today’s revisions which we summarize below).

With that introduction aside, this is how the revised payrolls numbers looked. 

Starting at the top, total US payrolls were revised dramatically lower starting with the Jan 2021 data and every month since, and net of the cumulative changes December 31, 2025 total nonfarm employment was revised lower by 1.029 million from 159.546 million to 158.497 million.

As expected, the bulk of the negative revisions took place in 2025, with negative revisions to 2024 amounting to -413K, 2023 was just -73K while 2021 and 2021 were revised modestly higher. 

Focusing on 2025, the negative revisions to both the year and previous years, meant that the change in total jobs for 2025 was revised from an already low +584,000 to a shockingly low +181,000. 

Finally, net of the aggressive revisions to 2025 monthly payrolls, what was previously an average increase of 48.7K jobs in 2025, has now been revised to just 15.1K!

Of course, this is not the first time the Dept of Labor confirmed it has massively revised jobs lower due to erroneous adjustment factors and birth-death additions. Recall, it was last September when we first warned the April 2024 – March 2025 period would be revised massively lower (we now know it was). But it followed another huge revision for 2024 which subtracted 818K jobs and also a 306K revision to 2023.

Putting it all together, we now know with certainty that the flawed Birth-Death model (as well as other smaller seasonal adjustments), led to 2.5 million jobs being revised away since 2019, with negative revisions in 6 of the past 7 years (only 2022 saw a modest positive adjustment)

Last but not least, more revisions are coming: while the January jobs report usually incorporates new population estimates from the Census Bureau into the household survey, those figures were delayed by one month due to last year’s record-long government shutdown. Officials from the Trump administration in recent days have tried to reset expectations for upcoming jobs numbers due to deportations and slower population growth. As a result, expect even more negative revisions next month.

Appendix: 

Those curious how the BLS changed its entire birth-death model methodology to incorporate current sample information each month (which follows the same methodology applied to the April through October 2024 forecasts during the 2024 post-benchmark period) should read question 9 in the CES Birth-Death Model Frequently Asked Questions. 

Additionally, a BLS article that discusses the benchmark and post-benchmark revisions and other technical issues is available here.

2025 closed with a surprising surge in consumer spending and retail sales, one which was unexpected since personal savings at the end of the year had just ground to a 3 year low…

… which when coupled with stagnant earnings prompted the question just where did consumers get the money for December’s spending spree. 

We now have the answer: at 3pm today, the Fed published the latest consumer credit data, and boy was it a doozy. After November’s tepid $4.2 billion increase in total consumer credit (which came in below estimates even after today’s revision to $4.7 billion), consensus was looking for a modest bounce to $8 billion, or well below the post-covid average. Instead, what the Fed reported was a stunner: consumer credit soared by a whopping $24.045 billion, the biggest monthly increase of 2025 by a wide margin (only Dec. 2024 was bigger going back all the way to 2023),..

… and not only was the number 3x higher than the median forecast, it came in above the highest economist forecast, in this case from RBC’s Michael Reid at $22.7 billion.

The breakdown shows that while the increase in non-revolving credit, or auto and student loans, was a bit more than recent monthly prints at $10.2 or the highest since May ’25…

… it was the surge in credit card debt (i.e. revolving credit) that was the big delta in the December numbers: at $13.8 billion, a huge jump from the $1.7 billion drop in November, this was the biggest monthly increase since 2023!

In other words, the unexpectedly strong close to the end of the year was funded by the same old source: credit cards, and as in all previous credit card fueled surges, this one too will have to be repaid, pulling from future spending at some point, although it very well may not if credit card companies just tacitly approve some more dry powder and instead just bury the average American under even more debt. 

As for student and auto loans, it was a surprisingly tame quarter because even though nonrevolving credit closed 2026 at a new record high of $3.780 trillion (with the two largest components student and car loans at $1.856 trillion and $1.562 trillion, respectively), the increase in the quarter was modest at best, up just $2.6 billion for student loans, and $0.8 billion for auto loans. What is remarkable is that auto loans actually declined in 2025 which may explain why the car industry has been so bad in 2025.

Finally, and this will come as a surprise to nobody, despite 1.75% in rate cuts by the Fed since last September, we can now confirm that rates on credit cards have gone… nowhere as banks continue to bleed US consumers dry: at the middle of 2023 the average rate on credit card accounts was 22.16%… and on Dec 31, 2025 – and a half years years later, the number was higher at 22.30%, just barely below the all time high of 23.37% set one year ago. And all thise despite 6 rate cuts by the Fed. 

One almost wonders: if it’s not the Fed setting rates on consumer credit, what’s the point of having a central banks?

The government reopened after another theatrical two-day shutdown, but that doesn’t mean that Friday’s payrolls report will come when it is due (after all, it’s not like the BLS had 30 days to prepare for it, oh wait, they did). Instead, the January employment report has been rescheduled for Wednesday, Feb. 11, according to the Bureau of Labor Statistics.

The data, originally due Feb. 6, was delayed by the partial government shutdown. BLS announced the changes Wednesday, shortly after funding for a number of agencies, including the Labor Department, was restored.

January’s consumer price index report, originally due Feb. 11, is now scheduled for Friday, Feb. 13, the BLS also said.

Other BLS reports that were due this week, including December’s Job Openings and Labor Turnover Survey and the Metropolitan Area Employment and Unemployment release, were also rescheduled.

The partial shutdown ended late Tuesday after President Donald Trump signed into law a funding deal he negotiated with Senate Democrats. The Labor Department, and most other government agencies, are now funded through Sept. 30.

In addition to the usual monthly payrolls and unemployment data, the January jobs report also includes highly anticipated revisions to annual employment. Those are expected to show that job growth was notably weaker in the year through March 2025 than initially reported.

Authored by Daniel Lacalle,

The IMF estimates for 2026 show no signs of recession. However, the global economy remains in a period of poor growth, high debt, persistent inflation and low productivity.

There may not be a recession, but citizens feel poorer as net real wages decline in most economies, remaining below pre-pandemic levels. Why? Because in most developed economies, GDP growth is bloated by government spending, which means high debt, followed by rising taxes that hurt investment and productivity.

The IMF has had to revise its United States estimates to more than double what they expected in early 2025, while Argentina clearly outperforms both the global and regional averages.

Global GDP growth is projected at 3.3% in 2026 and 3.2% in 2027, slightly above the October 2025 projections and broadly in line with 2025 levels.

US outperforms advanced economies

The positive surprise is the United States. Advanced economies are expected to grow by about 1.8% in 2026 and 1.7% in 2027 thanks to higher US figures, while emerging markets and developing economies reach around 4.2% and 4.1%, respectively, despite a slowdown in China.

The IMF calls this “resilient growth” after a year of warning about risks. This is surprising, because many analysts point out that we should be worried when the IMF starts giving bullish messages.

Despite the ironic comments, the IMF does warn about the poor levels of economic development in the leading economies.

The main drivers of economic strength come from AI‑related investment, accommodative financial conditions and private sector flexibility, which offset the negative impact of geopolitical risk and trade negotiations.

The US will be the only G7 economy escaping stagnation in 2025-2027

The Fund was clearly wrong about its estimates for the US economy published last year.

It now projects US growth at 2.4% in 2026, another relevant upward revision from its October 2025 forecast, considering stronger‑than‑expected 2025 data and a powerful impulse from AI‑related capital spending (data centres, chips, digital infrastructure).

For 2027, US growth is expected to moderate to about 2.0%, still above the advanced‑economy average.

The US will be the only G7 economy escaping stagnation in 2025-2027 and outperforming all its major peers with lower immigration, lower taxes and a reduction in government spending, while the major peers, Germany, Japan, France, UK and Canada, continue to disguise the private sector recession with more public spending and rising immigration.

The IMF has not admitted its mistake in assuming stagnation and elevated inflation due to tariffs and prefers to explain the massive upgrades justifying them on lower policy rates, ongoing fiscal support, and high-tech investment.

It is not important. The reality is that the US has proven wrong all the fearmongers and doom predictors and has turned into one of the main drivers of global demand in this forecast round.

Argentina: growth above global and regional averages

The IMF expects Argentina to grow by around 4% in both 2026 and 2027, clearly above the 3.3% world pace and significantly ahead of Latin America’s projected 2.2% in 2026 and 2.7% in 2027.

This comes after an estimated 4.5% expansion in 2025, following a 1.3% contraction in 2024. The International Monetary Fund explicitly links this impressive trajectory to the policies of President Milei and recent macro‑stabilisation efforts.

Argentina moves from chronic underperformer to clear outperformer in the IMF’s baseline

Argentina moves from chronic underperformer to clear outperformer in the IMF’s baseline, especially with a weak outlook for Mexico and Brazil.

Supply-side policies, private sector focus and abandoning interventionism in energy are among the factors that put a faster‑growing US and Argentina as the “pockets of strength” that allow global growth to stay around 3.3% despite the euro area and LatAm stagnation.

Low growth in Europe

For the euro area, the IMF shows moderate but gradually improving growth. However, most of it comes from Germany’s increasing debt.

Real GDP is projected to expand by 1.3% in 2026 and 1.4% in 2027, a slight upward revision versus the October 2025 outlook and consistent with the ECB’s own projections.

However, we cannot forget that this disastrous economic growth comes in the middle of the Next Generation EU stimulus plan and with rate cuts.

Germany is expected to recover from near‑stagnation towards 1.1% in 2026 and 1.5% in 2027 only due to a more than debatable public spending and indebtedness programme.

France is expected to show no real growth by about 1.0% and 1.2%, driven by government spending.

The IMF’s message is that, compared with the United States, the euro area remains a low‑growth region, constrained by weak productivity and excessive regulation and taxes.

For the United Kingdom, the Fund keeps an optimistic forecast at 1.3% growth in 2026 and 1.5% in 2027. It is said that, after the US, the UK and Canada are the fastest‑growing G7 economies.

This reminds us that net zero, high taxes and big government are the recipe for stagnation.

Canada is projected to expand by just 1.4% per year in 2026 and 2027. Japan will only show 0.7% growth in 2026 and 0.6% in 2027, according to the IMF, despite years of government spending on so-called stimulus.

In Asia, the IMF focuses its attention on the Chinese slowdown, offset by the strength in India.

China is projected to grow by 4.5% in 2026 and 4.0% in 2027, slower than its 5% growth in 2025. However, it is still one of the main engines of global expansion, despite the ongoing challenges facing the real estate sector.

India remains the fastest‑growing large economy in the IMF’s outlook, with growth around the 6% range in both 2026 and 2027, driven by domestic demand. India is, according to the IMF, the high beta growth story in Asia.

The IMF should recover economic sanity recommendations and remind governments that supply-side and market-oriented economies focused on strengthening the private sector are the drivers that the global economy requires, and that constant public sector expansion hinders growth and creates financial weakness.

We may not have a recession, but weakness in developed and emerging economies is unjustified, and the main culprit is government interventionism.

Following the dramatic rebound in US Manufacturing survey data – driven by a surge in new orders – ‘Soft’ data has bounced back dramatically from its post-government shutdown lows (which is ironically occurring as the hard data – which was so resilient through the shutdown – has started to roll over)…

…and this morning’s Services Sector survey data builds on that rebound

• S&P Global’s US Services PMI signaled a better than expected expansion of 52.7 in January (52.5 exp), rebounding from April 2025 lows.

• ISM’s US Services PMI survey also beat expectations in January (53.8 vs 53.5 exp), but was flat from a revised lower 53.8.

But both still solidly in expansion…

The S&P Global US Composite PMI recorded 53.0 in January. That was up from 52.7 in December and represented a solid rate of growth in private sector activity. Both sectors covered by the survey recorded stronger output expansions, in line with faster gains in new business. Employment meanwhile rose only marginally, while confidence in the outlook softened.

Despite the rebound, US has been overtaken by UK and Japan in terms of global PMIs…

“Sustained service sector growth, supported by a robust rise in manufacturing output in January, indicates the economy is growing at an annualized rate of around 1.7%,” according to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

However, that is a lower gear compared to the pace of expansion seen prior to December’s slowdown, and hints at GDP growth cooling in the first quarter.

Consumer-facing companies are increasingly reporting a challenging environment, with demand for services falling in January having nearly stalled in December, “reflecting low levels of consumer sentiment and cost of living pressures,” Williamson noted.

The ISM data showed a triple whammy of higher prices, lower new orders, and lower employment…

However, as Williamson concludes, “inflationary pressures in the service sector meanwhile remain elevated, blamed on the pass though of tariff related price increases and wage growth, though stiff competition is often reported to have limited the impact on final selling prices.”

“While financial and business service providers are reporting a more resilient picture, demand growth here is also showing signs of fraying amid heightened concerns over the economic outlook, in turn often blamed on political uncertainty.

However, there is a silver lining, as Williamson concludes: “lower interest rates and favorable financial conditions, higher government spending, combined with more active sales and marketing efforts, are propping up business sentiment and spending, and also encouraging modest hiring.”

Lawmakers in the California State Assembly have moved to direct the Transportation Commission to prepare a study on the effects of a road charge for delivery to the legislature.  A road charge is a program that imposes fees based on the number of miles each citizen drives over a specified period, and is designed to offset gas tax losses from the wider use of electric cars on California roads. 

In 2014, California passed Senate Bill 1077, authorizing a “Road Usage Charge Technical Advisory Committee” to explore whether the state could replace its gas tax with a mileage-driven tax.  The project was based on the assumption that “cleaner vehicles” and a potential zero-emission future would lead to dwindling gas tax revenues. 

The state has been running road charge pilot programs since 2016. Last year, a pilot project concluded where mileage rates were set at 2.5 cents per mile for light-duty vehicles, such as cars, and other vehicles weighing less than 10,000 pounds. The rate for heavy-duty vehicles is dependent on their weight.

Today, proponents complain that implementation is not going fast enough.  The latest bill is being called an “extension” of the pilot project and not a move to pass the actual tax.   Democrats assert that Republicans are interfering with the project and misrepresenting its intent.  However, taxes based on climate ideology are often kept on the shelf by exploratory committees, waiting for politically opportune moments to pass them quickly with minimal public opposition or debate.  The Democrats are simply biding their time.

It is not clear yet when the mileage tax will be made official or if it will replace the gas tax; it is far more likely that both taxes would ultimately exist in tandem.  Republicans argue that the tax is unfair to residents of rural counties where driving distances are much greater and gas vehicles are common.  The tax is useful, though, for climate “re-wilding”:  The globalist idea of forcing people to abandon rural areas and move into population centers so that large swaths of the nation can be “returned to nature.”   

California currently has the highest gas taxes in the country.  Total state taxes and environmental fees frequently exceeding .90 cents per gallon, contributing significantly to the nation’s highest pump prices ($4.30 per gallon compared to a national average of $2.87). 

Over the past few years Governor Gavin Newsom and Democrats have sought to deflect blame for the state’s exorbitant fuel costs by accusing oil companies of “price gouging” consumers; a claim which was ultimately proven false the government’s own investigations. State interference has led to multiple refinery closures and the loss of numerous small business gas stations; prices are expected to rise even further.  

The relentless (and baseless) hostility towards the oil industry in liberal states is forcing citizens into electric vehicles, but officials have no intention of letting the public escape taxation.  The concept goes well beyond the old school idea of toll roads.  A charge for mileage could require intrusive surveillance technology, including “black box” GPS devices in every vehicle to track miles driven.  Or, yearly inspections of odometers with arduous paperwork and bureaucratic red tape. 

If they can’t tax the gas, they will tax residents simply for driving.  Next comes a tax simply for breathing.          

Here we go again.

The government shutdown, which should be lifted in 24-48 hours once the House votes (we reported yesterday that Mike Johnson allegedly has the votes to pass the vote), is again jamming the machinery of government data reporting. 

The BLS has pushed back the January 2026 jobs report, originally set for Feb 6, along with December’s Job Openings and Labor Turnover Survey and Metropolitan Area Employment data.

“The release will be rescheduled upon the resumption of government funding,” Emily Liddel, an associate commissioner at BLS, said in a statement. “Due to the partial federal government shutdown, the Bureau of Labor Statistics will suspend data collection, processing, and dissemination.”

The Bureau of Labor Statistics will announce new release dates once funding is restored.