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Update (9:40am ET): In response to the EU’s decision to freeze ratification of Trump’s landmark deal, the US president has come out swinging and on Truth Social threatened any countries that “play games” with the supreme court decision that they “will be met with a much higher tariff.” It just isn’t clear what the procedure for these much higher tariffs – aside from Section 122 which is limited to 150 days – will be now that IEEPA has been ruled unconstitutional.

Earlier:

In the aftermath of Friday’s SCOTUS decision to reverse Trump’s tariff policy, one lingering question is what happens to the bilateral trade deals Trump struck with various countries (and which supposedly would lead to hundreds of billions of fresh investment into the US). Well, in the case of the EU we no longer have to wonder:

The morning, the European Union said it would freeze the ratification process of its trade deal with the US and was seeking more details from the Trump administration on its new tariff program. Zeljana Zovko, the lead trade negotiator in the European People’s Party group on the US deal, said in an interview with Bloomberg that “we have no other option” but to delay the approval process to seek clarity on the situation. 

The main political groups in the European Parliament say they’ll suspend legislative work on approving the trade deal on Monday, days after the US Supreme Court struck down Trump’s use of an emergency-powers law to impose his so-called reciprocal tariffs around the world.

The center-right EPP, which is the largest political bloc in parliament, will be joined by parties including the Socialists & Democrats and the liberal Renew group to back freezing the process. 

According to Bloomberg, Bernd Lange – chairman of the parliament’s trade committee – called an emergency meeting later Monday to reassess the EU-US trade accord. He said over the weekend that parliament should delay work on the trade accord until the EU receives more clarity on the new tariffs. EU ambassadors will also meet Monday afternoon to discuss the US trade relationship.

Trump’s announcement following the court decision to impose a 10% global tariff, which he then increased to 15%, left many questions unanswered for American trading partners, stirring up more economic turbulence and uncertainty about the US policy.

As a reminder, the deal struck last summer between Trump and European Commission President Ursula von der Leyen would impose a 15% tariff rate on most EU exports to the US while removing tariffs on American industrial goods heading into the bloc. The US would also continue to impose a 50% tariff on European steel and aluminum imports. The bloc agreed to the lopsided deal in the hopes of avoiding a full-blown trade war with Washington and retaining US security backing, particularly with regards to Ukraine. Parliament had been aiming to ratify the agreement in March.

The trade deal had already faced a rocky path to ratification. After the initial agreement, the US expanded its 50% metals tariff to hundreds of additional products, angering EU lawmakers and European officials. Trump’s Greenland threats amplified that frustration, leading some to call for the deal to be canceled.

EU lawmakers froze the approval process once before, after Trump threatened to annex Greenland. After Trump backed down from his push to annex Greenland, a Danish territory, EU lawmakers briefly restarted the trade deal ratification process. But they also introduced changes such as a sunset clause, meaning that even if parliament ultimately approves the agreement, it will have to go back to other EU institutions for further negotiations. 

Submitted by Thomas Kolbe

At times, it seems almost absurdly comical when senior European Union officials make conspicuous efforts to court local business on foreign trips. Didactic in tone, nearly arrogant in their demands toward potential trade partners, and buoyed by a taste for moral superiority, the EU takes the global stage.

It still attempts to force large parts of the world into Brussels’ doctrinal playbook—as if economic cooperation could be achieved through normative decrees.

Meanwhile, its own economic weakness is either overlooked or deliberately ignored.

Economic strength would at least provide some justification for such demands.

Yet the ongoing relocation of European industry to Asia and the United States undermines any carefully staged display of supposed superiority.

From February 17 to 19, France’s President Emmanuel Macron visited India—the newly discovered object of European diplomatic desire.

In Brussels, high hopes are pinned on Prime Minister Narendra Modi: unspoken is the goal of trade-policy support in the battle against Donald Trump’s America.

For Macron, this India trip could have been an easy diplomatic exercise—without missteps, without verbal blunders, simply by observing routine protocol.

He could have used the opportunity to study how a booming AI hub is being built. Instead, he presented his bewildered hosts with Europe’s “third way”—a performance that at best left them perplexed, likely met with a shrug.

Macron advocated for “transparent” AI focused on open-source models, strict privacy standards, and societal benefits in health, education, and especially climate protection. Initiatives like “Current AI,” an EU-funded €2.5 billion project to finance nonprofit activities, confirm what is already obvious: Brussels still believes technological innovation can be decreed by the state.

But new technologies do not emerge administratively or via bureaucratically managed grants. Innovation thrives where free markets operate, entrepreneurship takes risks, and open capital markets enable customer-oriented value creation.

For Emmanuel Macron, Friedrich Merz, and Ursula von der Leyen, this insight may seem like a dangerously heretical lesson. Yet it describes nothing more than the only viable civilizational path: an open self-discovery process that allows mistakes, does not stigmatize risk, and provides bold pioneers real opportunities—essentially turning EU policy upside down.

European policy has little interest in fostering genuine open-source dynamics—even if desirable for a flourishing market economy. Rather, the impression solidifies that state control mechanisms are being secured: through regulatory backdoors, software tools, and laws like the Digital Services Act—with the aim of steering markets and, above all, controlling public discourse.

Macron delivered perhaps his most revealing remarks before students in New Delhi at the AI Impact Summit. He lamented the lack of control over platforms like Elon Musk’s X and spoke of missing transparency. A “jungle” had arisen in which no one knew who was saying what, algorithms were beyond state reach. In this context, he called appeals to freedom of speech “bullshit”—a striking moment of candor that accurately reflects the stance of much of the EU’s political elite.

They are engaged in an open struggle with citizens—at least with the portion who see themselves as the true sovereign and view politics as representation within a democratic state, not an educational disciplinary apparatus. Macron, however, seems convinced he can use aggressive opinion control to postpone both the collapse of his minority government and the looming state insolvency—at least until his own political exit is secured.

Back in wintry Germany, his counterpart Friedrich Merz struck a similar note. At a CDU Ash Wednesday event in Trier, the chancellor outlined his vision for future communication platforms: real-name requirements and digital identities for youth. Translated, this means nothing less than the gradual end of online anonymity—a space that has so far been essential for opposition voices and political coordination.

The pressure to act grows: month after month, the European economy loses substance—regardless of, or precisely because of, the intensity of state intervention in the shrinking remnants of the continent’s once-proud social market economy.

The gap between aspiration and reality in Europe was recently on display at the Munich Security Conference. EU foreign policy chief Kaja Kallas presented Brussels’ demands toward Russia as a basis for potential peace talks. Moscow must make substantial compromises—limiting forces, cutting the military budget, and recognizing Ukraine’s pre-2022 borders. Territorial concessions or legitimizing occupied areas are out of the question. Sanctions and future use of frozen Russian assets, particularly via Euroclear, remain leverage.

A reminder: Russia’s de facto dominance in the Ukraine conflict is measured not least by its effects on Europe—ongoing energy crises across much of the continent and the visible erosion of the European economy. That Europeans weren’t even at the table in recent pre-negotiations for a peace deal is a diplomatic humiliation. Yet even this does not seem enough to fundamentally question their strategy or objectively assess reality.

Instead, growing elite resentment is increasingly directed inward. Citizens expressing dissatisfaction and supporting nationally sovereign political forces fall under scrutiny. This reflects a fear of competition that might effectively challenge what is perceived as coercive EU policy.

Upcoming state elections will reveal just how resilient the firewall really is—one that delivers more mass migration, digital censorship, and the construction of a green-military socialism.

* * * 

About the author: Thomas Kolbe, a German graduate economist, has worked for over 25 years as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination.

There was a big surprise at 8:30am ET when the BEA reported the (delayed) GDP print for the last quarter of 2025: With consensus expecting a 2.8% print  (and the Atlanta Fed GDPNow model even higher) which would already be a big drop from the 4.4% in Q3, the BEA instead reported that the US economy grew at just 1.4% in the fourth quarter, the slowest growth since the tariff shock of Q1 2025.

According to the BEA, the contributors to the increase in real GDP in the fourth quarter were increases in consumer spending and investment. These movements were partly offset by decreases in government spending and exports. Imports, which are a subtraction in the calculation of GDP, decreased. 

Overall, the economy expanded 2.2% last year, data from the Bureau of Economic Analysis showed.

Specifically, the Q4 breakdown was as follows:

• Personal consumption slowed notably, from 2.34% of the bottom line GDP to just 1.58% or more than 100% of the final 1.42% GDP print
• Fixed Investment contributed to 0.45% of bottom line GDP, up from 0.15% in Q3
• Change in private inventories added 0.21%, up from a decline of -0.12% in Q3
• Net exports (exports less imports) continued to normalize and in Q4 added just 0.08% to the GDP number, down dramatically from 1.62% in Q3
• Last and definitely worse, government was actually a major drawdown, reducing the Q4 GDP by 0.9%, a sharp reversal from the 0.38% addition in Q3.

And visually:

Of the above, the most notable variable was government spending, which due to the government shutdown in Q4 tumbled by 5.1% – the biggest drop since covid – and subtracted 0.9% from the final GDP number.

Knowing in advance how bad the number would be due to the shutdown, less than an hour before the data were released, Trump posted on social media that the shutdown would cost the US “at least two points in GDP.”

That may be an exageration, but it is modest: if one takes the average growth in recent quarters due to government which is about 0.5-0.6% and subtracts the 0.9% hit in Q4, the actual swing is about 1.5%. 

Of course, this is just a delayed reversal, and expect to see Q1 GDP offset by this much if not more, meaning Q1 GDP will likely print around 4%.

Government slowdown aside, perhaps an even more notable print is the continued explosion in spending on computers/peripheral equipment courtesy of AI, which has surged 70% in the past year and has more than doubled to $300BN at the end of 2025, more than double since the launch of chatGPT in 2022. 

Despite the year-end slowdown, the data capped a solid year for the US economy, which shrank in the first quarter amid a monumental pre-tariff surge in imports, only to round out 2025 with one of the strongest growth rates in years. The turnaround came after Trump backed off of his most punitive levies and the Federal Reserve lowered interest rates, helping drive the stock market to record highs and enabling wealthier Americans to keep spending.

Separate monthly data out Friday showed the Fed’s preferred measure of underlying inflation — the core PCE index — rose 0.4% in December, the most in nearly a year. On an annual basis, the core PCE, which excludes food and energy, climbed 3%, compared to 2.8% at the start of 2025. All of these prints were hot…

… suggesting that all else equal, the US is once again flirting with stagflation, although as has so often been the case, the Q4 GDP print is an outlier, as is the December PCE, the first impacted by the government shutdown the second heated up by higher commodity prices which will reverse as soon as the geopolitical circus involving Iran quiets down. 

The Trump administration’s crackdown on illegal immigration has resulted in an 80% collapse in net immigration to the USA, and has fundamentally altered the mathematics behind the nation’s labor supply to the point where the level of job growth needed to maintain economic stability is now far lower, according to a new Goldman analysis. 

After a flood of more than 10.8 million illegal immigrants (official figure) entered the United States under Biden, net immigration – both legal and illegal – has gone from roughly one million people per year in the 2010s to around 500,000 in 2025, with a further drop to just 200,000 projected by Goldman for 2026. This has sharply reduced labor-force growth and lowered the economy’s “breakeven” pace of job creation, the bank opines.

Here’s Goldman vs. Brookings vs. the Congressional Budget Office on net immigration:

Now, the US will only need around 50,000 new jobs per month by the end of this year to keep the unemployment rate from rising, down from roughly 70,000 today.

At the same time, Goldman says labor demand still looks “shaky” because job growth is narrow and job openings are trending lower – with the main downside risk being a faster, more disruptive AI-driven adjustment that could tamp down hiring or raise job losses beyond current estimates. 

Elevated deportations, tighter visa / green-card policies, a pause in immigrant visa processing that affects dozens of countries, and the loss of Temporary Protected Status for some groups, Goldman suggests there is additional downside risk to the workforce.

A shakier demand picture

Of course, new math on the labor supply doesn’t mean the labor market is strong (duh)… In fact, Goldman describes demand as “shaky,” writing that job growth has become increasingly narrow – dominated by healthcare – and that job openings have continued to fall. Openings are now around seven million, below pre-pandemic levels and still declining.

Because fewer new workers are entering the economy, hiring no longer needs to run as hot to prevent unemployment from drifting higher. “A small pickup is all that should be needed to sustain job growth at the breakeven pace,” according to the report, arguing that weaker-looking payroll numbers may increasingly mask a labor market that is merely treading water rather than deteriorating.

Official data from the Bureau of Labor Statistics show a similar trend, with job openings drifting toward the mid-six-million range late last year. A continued slide in openings, Goldman warns, would increase the risk that unemployment rises more meaningfully, even with slower labor-force growth.

There is also a risk that tighter immigration enforcement is pushing more workers into informal or off-the-books employment. If so, official payroll data could understate the true level of labor-market activity, complicating the Federal Reserve’s task of gauging economic momentum.

AI looms as the wildcard

Goldman sees artificial intelligence (AI) as the largest downside risk to the labor outlook – not because it has already triggered mass layoffs, but because it may restrain hiring at the margin. So far, the firm estimates that AI-related substitution has shaved only 5,000 to 10,000 jobs from monthly growth in the most exposed industries. But a faster or more disruptive deployment could weigh more heavily on demand.

…the main reason that we worry about downside risk to our baseline forecast that the labor market will stabilize going forward is the possibility of a faster and more disruptive deployment of artificial intelligence (AI). While plenty of recent anecdotes point to a potentially faster rate of adoption and corresponding job losses, it is hard to know how these will translate to macroeconomic outcomes. -Goldman

The bank shows that job growth has slowed and turned slightly negative in several subindustries where AI is most ready to deploy, while company-level anecdotes indicate that AI is already reducing the need for workers. The impact, while visible, remains ‘moderate’ so far. 

For now, the bank expects the unemployment rate to drift only modestly higher, toward 4.5%, while Goldman chief economist Jan Hatzius said in a separate note (available to Pro subs) that the probability of a recession next year is “moderate” at 20%. The labor market, in the firm’s words, is taking “early steps toward stabilization.”

The paradox is that stability may increasingly look like weakness. As immigration slows and the workforce grows more slowly, payroll gains that once signaled trouble may soon be enough to keep the labor market steady – at least on paper.

h/t Capital.news

Despite slumping sentiment surveys, ‘hard’ data continues to suggest the US economy is ticking along nicely with Industrial Production surging 0.7% MoM in January (better than the +0.4% MoM expected and well up from the downward revised +0.2% MoM in December).

This is the 3rd straight monthly increase in Industrial Production, lifting growth to 2.3% YoY – the best annual growth since Sept 2022…

Source: Bloomberg

Under the hood, US Manufacturing output rose 0.6% MoM (better than the +0.4% MoM expected and best monthly gain since Feb 2025)…

Source: Bloomberg

That is the fast annual growth in manufacturing since Feb 2022.

Capacity Utilization rose to 76.2% (below expectations),m extending the positive trend since the start of Trump’s term…

Source: Bloomberg

Finally, circling back to the ‘soft’ survey data we noted at the beginning, we note that ISM Manufacturing exploded higher in January (after decoupling from hard data all year)…

Does make you wonder whether any of these surveys are real? Or did the Democrats being interviewed finally throw in the towel on the doomsaying?

Authored by Daniel Lacalle,

Inflation, bloating GDP with public spending and immigration and hidden unemployment are the ingredients of the so-called “economic miracle” of the Sánchez administration.

Spain closes 2025 with the consumer price index (CPI) rate above the euro area average and higher than all the large economies in Europe.

Cumulative inflation, measured by CPI, during Sánchez’s term reached 24.8%. Housing and food have risen by almost twice as much as the headline CPI.

The reality of Spain is that the loss of purchasing power and the impoverishment of Spaniards are the result of years of interventionist policies.

Home purchase prices have soared by more than 38%, housing-related expenses (rent, utilities, maintenance) have risen by more than 30%, and food prices are up around 38%.

The “real shopping basket” studies find increases of between 40% and 60% in basic products between 2019 and 2025, showing that inflation in essential goods has been far higher than the official average.

Between 2019 and 2025, real wages in Spain have fallen by 0.3%, according to CaixaBank, but the picture is much worse if we look at net real wages, which have fallen by more than double because the government refused to index taxes to inflation and has sharply increased the fiscal burden of families and businesses.

GDP growth, productivity, and the statistical mirage

Government propaganda claims that productivity and GDP per capita “grow” by using the pandemic collapse as the starting point of the series. In other words, because Spain fell more than anyone else, now it “grows.” The reality is very different.

Labour productivity per occupied person, compared with the EU average, has fallen from 99.8% in 2018 to 97%. Bouncing back is not growing, and even less so when the government is bloating GDP with government spending and immigration. 

A quarter of Spain’s net real GDP gain over 2019‑2025 is directly explained by higher public consumption, and more if you include EU‑funded public investment and subsidies classified under other items, according to CaixaBank Research.

Furthermore, real GDP per capita is expected to grow by a mere 1.1% between 2017 and 2026, according to the IMF. The large increase in immigration disguises a weak productivity model inflated by debt and public spending.

Spain’s socialist “growth” model, doped by immigration and public spending, leaves weaker productivity growth and stagnant GDP per capita

This is where the statistical mirage of Spain’s alleged “superior” growth becomes evident: headline GDP is inflated by a strong increase in immigrant population, a ballooning public sector, and the injection of one-off EU funds, while GDP per capita and productivity stagnate or worsen.

Spain’s socialist “growth” model, doped by immigration and public spending, leaves weaker productivity growth and stagnant GDP per capita, dependent on an annual net debt issuance of more than 50 billion euros. It is a recipe for ruin.

In purchasing power standards, Spain’s GDP per capita was 91% of the EU‑27 average in 2019 and is now around 90%, thus still below its pre‑Covid relative position despite the “strong growth” propaganda.

That implies an average annual real GDP per capita growth of only about 1.1–1.4% over 2019–2025. In other words, by 2025 Spain had finally surpassed its 2019 real GDP per capita, but the net gain per person after six years is modest, disguised by a large increase in government spending and one-off EU funds, and much smaller than the headline cumulative GDP growth figures suggest.

Hidden unemployment – another hallmark of the Sanchez government

In 2021, with the labour market “reform,” it became mandatory to convert short-term and seasonal contracts into “discontinuous permanent” contracts.

With this statistical regulatory change, people on this type of contract are not counted as unemployed even when they are not working, and also if they are receiving unemployment benefits.

Thus, it is no surprise that in nine provinces there are more people receiving unemployment benefits than officially registered unemployed.

Official labour office (SEPE) statistics show that in Almería, Huelva, Jaén, the Balearic Islands, Huesca, Teruel, Soria, Castellón, and Cáceres, the unemployment coverage rate exceeds 100%, meaning there are more unemployment benefit recipients than officially unemployed.

In January 2019, the number of jobseekers “with an employment relationship” was 280,389. In December 2025, the figure was 892,933, more than three times higher.

This means that effective unemployment has hardly improved at all since 2019, and the real effective unemployment rate is around 13.6% compared with the 9.9% official figure.

The activity rate has been stagnant at 59% since 2019, which is another example of a weak labour market.

At the end of December 2025, the total number of people registered with SEPE seeking work stood at 3,854,911, which means there are 1,446,241 more people not working than the official “registered unemployment” figure.

Thus, registered unemployment has fallen by 152,048, while real unemployment (the number of people registered with SEPE who are not working) would have increased by 50,609.

The number of people not counted as unemployed in SEPE data in December reached 1,893,134 and represents 44% of the total number of registered job seekers. The number of inactive people receiving unemployment benefits increased in 2025 compared with 2024 by 64,175.

A model based on propaganda, not reality

Spain’s economic miracle is just a statistical mirage. Spain’s “superior” GDP growth is not due to each person producing more (down, -1.7% 4Q2019-4Q2025, as the working population grew by 12.5%, but GDP by only 10.6%), and the unemployment reduction is distorted by the record number of inactive workers not considered unemployed even if they get an unemployment subsidy. The number has tripled since 2019.

Sánchez has implemented a model based on propaganda, not reality, sweeping real unemployment under the rug, doping GDP with debt, immigration, and European funds, and leaving a reality of worse net real wages and atrocious productivity.

Spain may seem like an economic growth miracle in headlines, but details show a time bomb that will explode once the placebo effect of debt fades and immigration’s net negative impact on public accounts soars.

Authored by Daniel Lacalle,

The latest social financing figures from China show an economy that is increasingly relying on government debt while private demand for credit remains weak. The strength of the Chinese technology sector and its exporting companies gives enough room for leverage. However, behind the weak private sector credit demand lies an evident economic slowdown that the Chinese government acknowledges, challenging consumption patterns, a significant overcapacity problem, and the depth of the housing crisis.

The current economic model, focused on delivering 5% real economic growth, requires larger doses of debt to achieve smaller increments of growth, especially productive sector growth. The government has focused on reducing debt and overcapacity imbalances while reorienting its exports and financial system to lessen dependence on the US dollar; however, the main challenge for the Chinese economy remains boosting consumer demand, despite rate cuts and easing financial conditions.

To understand the intensity of debt of the Chinese model, we must go to the year 2000 and see the acceleration in the flow of debt, not just the current stock. At that time, real GDP growth was around 8–9%, so each percentage point of growth came with roughly 13–16 points of debt‑to‑GDP. Government debt was very low, at around 25% of GDP, and most leverage sat in the state-owned corporate sector with modest household debt. China was able to deliver near‑double‑digit growth with a total non‑financial debt ratio barely above 120% of GDP.

By 2023, non‑financial sector debt had risen to about 285% of GDP, more than doubling its level of 2000. Chinese think‑tanks and official commentators put the “macro leverage ratio” closer to 300% of GDP by 2025, according to the Chinese Academy of Social Sciences. The macro leverage ratio rose by 11.8 percentage points to 302.3 percent in 2025, exceeding the 10.1-point increase reported in 2024.

Over the same period, the trend of real GDP growth has slowed to roughly 4–5%, so each percentage point of growth now requires around 60–75 points of debt‑to‑GDP, more than three times the debt per point of growth required in 2000. Furthermore, it comes mostly from government debt.

In January 2026, aggregate social financing jumped by 7.22 trillion yuan, significantly higher than in the same month of 2025 and above market expectations, consistent with 5% annual GDP growth and a larger composition of the public sector in the mix. Outstanding social financing reached 449.11 trillion yuan at the end of January, rising 8.2% year‑on‑year, while money supply (M2) rose by 9%.​

New yuan bank loans were 4.7 trillion yuan, about 420 billion less than a year earlier and significantly below consensus, showing the weak private‑sector credit demand and the prudent approach of Chinese customers and businesses to debt addition. RMB loans outstanding stood at 276.62 trillion yuan, up only 6.1% year‑on‑year, clearly below the pace of overall financing and money growth.

The driver of credit growth in China is no longer households and private firms but the government and state-owned companies.

The real estate problem has impacted Chinese families in numerous ways. Not only did most of them see the value of their homes decline, but many families invested in the attractive yields of real estate developers’ commercial paper, which led to large losses and even the wipe-out of savings for many. Additionally, despite the excess in supply of houses, prices have not fallen enough to warrant enough appetite for new mortgages, as affordability remains an issue and the traditional prudence of Chinese citizens when it comes to consuming and borrowing adds to the challenge.

Beijing plans to issue 4.4 trillion yuan in local government special‑purpose bonds in 2025, 500 billion more than in 2024, looking to boost government investment and a “proactive fiscal policy,” knowing that raising taxes would be exceedingly negative for growth and consumption.

Local governments are expected to issue more than 10 trillion yuan in bonds in 2025, including refinancing, general bonds, and new special bonds.

The Chinese government knows that it can manage more debt but also sees the weak investment and household spending and acknowledges that large tax increases would be counterproductive.  However, to prevent future debt-driven stagnation, a focus on productivity is necessary.

The official budget sets a deficit of 4% for 2025. However, once all budget items are consolidated, including government funds, special bonds, and off‑budget vehicles, this true fiscal deficit in 2025 is closer to 9%, up from 7.7% in 2024, according to Rhodium Group and JP Morgan. China increasingly relies on hidden or almost fiscal borrowing to support growth.

With outstanding social financing now around 449 trillion yuan and real growth around 4–5%, each incremental point of GDP is increasingly linked with a much larger stock of debt than a decade ago. This rising credit intensity of growth may prevent a significant slowdown but may create a significant fiscal challenge in the future. The Chinese model demands high growth and low taxes; any change to the fiscal system will be negative.

For years, local governments relied on the sale of land for property development to collect tax receipts. Thus, the drag from real estate is evident in the economy and in fiscal sustainability. Real estate development investment fell 13.9% year‑on‑year in the first three quarters of 2025, with residential investment down 12.9%, the steepest drop since 2021, according to official figures. Property investment and sales both posted double‑digit declines in 2024, and forecasters expect real estate investment to fall another 11% and sales to drop 7.5% in 2025, according to Reuters, with further declines in 2026 before stabilizing only in 2027… if it happens as fast as consensus estimates.

The property sector, once a key engine for economic growth and tax receipts, absorbs new credit to stabilize its accounts without boosting growth or creating a multiplier effect.

Additionally, China’s industrial capacity utilization remained at 74.9% at the end of 2025, well below the 78.4% peak reached in 2021. Overcapacity is clear in steel, autos, legacy chips, and parts of sectors like green tech, where expansion has surpassed domestic and external demand. Thus, the purchasing managers’ indices show weak new orders and foreign demand, while bankruptcies and insolvencies have risen, although not to levels that would indicate a financial crisis.​

The Chinese economy needs to reopen, improve investor and legal security and allow the housing slump to materialize fully to see the type of productive economic growth it needs to avoid much larger increases in debt. Otherwise, the risk of stagnation will likely be elevated as population growth stalls, overcapacity remains, and the stock of unsold property becomes a larger liability.  

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.