Hot Takes:

• Long-term unemployed as a percent of total unemployed is four percentage points higher than pre-pandemic, a potential harbinger of things to come.

• Trade tensions put pressure on manufacturers, driving up delivery times and prices paid, according to the latest ISM survey.

• The stable job market is providing the necessary support for an economy filled with uncertainty, but watch out for early signs of weakness, such as the rising ratio of long-term unemployed.

• For now, we expect the economy to grow, especially in the latter part of the year. The engine of growth will likely come from insatiable demand for artificial intelligence, power generation plants, and other capital investments.

• Expect market volatility to continue. We’ve seen markets be especially sensitive to news headlines, and we don’t expect much to change in the near term.

 

Trade Tensions Put Cracks in Delivery Times

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Purchasing managers in the manufacturing sector reported an increase in delivery times in May, reminiscent of supply chain disruptions from recent years. This time, it’s not a pandemic, but trade uncertainty. Investors will get an uncomfortable reminder that policy has consequences. Many industries are reeling from the whiplash. Those in the transportation equipment industry bemoaned the fact that ever-changing trade policy has created mayhem on suppliers’ ability to react and remain profitable. Companies in the machinery and the primary metals sectors reported difficulty in determining pricing in recent weeks, and the lack of clarity will likely continue, creating confusion for the earnings outlook.

 

Delays at ports of entry and quibbling over who should bear the tariff burden have increased delivery times above 2019 levels. One encouraging observation is supplier deliveries are not slower than 2018 levels during the Trump 1.0 trade policies.

 

A Steady Labor Market Will Support Consumer Spending

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Real disposable personal income in April rose 0.7% from a month ago, the fastest pace since January 2024, indicating the stable job market is providing the necessary support for an economy filled with uncertainty.

 

However, investors should be mindful of the number of long-term unemployed as a harbinger of things to come. The ratio of long-term unemployed to total unemployed has increased for three consecutive months, rising to 23.5%. For context, the ratio was 19.2% in February 2020.

 

On Friday, the Bureau of Labor Statistics will publish the May jobs report, and we expect payrolls grew last month but not as much as consensus expects. Trade uncertainty heavily impacts small businesses, the engine of job creation for the U.S. economy, and this latest report could be the first to show the impacts of volatile trade policy.

 

Spending Growth Is Above Annual Income Growth

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Despite the rebound in monthly income data, the longer-term growth of income is not strong enough to support spending in the coming months. Consumer spending growth has outpaced income growth for several months now, and investors should not be surprised if consumer spending takes a breather in the near term. However, broader economic growth could be sustained by demand for artificial intelligence, power generation plants, and other capital expenditures.

 

Spending Will Decelerate Unless Income Growth Catches Up

• Source: LPL Research, Bureau of Economic Analysis 06/03/25

 

Summary

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We expect another encouraging inflation report for May, but then we could expect a reacceleration in consumer prices later this summer. If the job market holds, we still expect the economy to grow in 2025, albeit at a slower pace than in the previous few years.

 

As it relates to capital markets, we expect volatility to continue. Following the recent stock market rebound, the Strategic and Tactical Asset Allocation Committee (STAAC) does not rule out the possibility of a reversal lower amid ongoing uncertainty around tariffs. LPL Research continues to monitor tariff negotiations, economic data, earnings, the bond market, and various technical indicators to identify a potentially more attractive entry point to add equities on weakness.

 

During periods of policy uncertainty, LPL Research prefers to stray little from its benchmarks. In that spirit, the Committee recently upgraded emerging market (EM) equities to neutral, leaving regional preferences across the U.S, developed international, and EM aligned with benchmarks. Among sectors, the Committee favors just communication services and financials.

 

Within fixed income, STAAC holds a neutral weight in core bonds, with a slight preference for mortgage-backed securities (MBS) over investment-grade corporates. The Committee believes the risk-reward for core bond sectors (U.S. Treasury, agency MBS, investment-grade corporates) is more attractive than plus sectors. The Committee does not believe adding duration (interest rate sensitivity) at current levels is attractive and remains neutral relative to benchmarks. The Committee would get more interested in adding long-term bonds if the U.S. 10-Year Treasury yield got closer to 5%.

 

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