Weekly Research Briefing: Well That Settles It

"Looking at the totality of the data over the past year, there has been a gradual cooling in labor market conditions to levels similar to those that prevailed in the years prior to the pandemic. You can see this pattern in the data on hiring and quits rates, vacancies, and survey measures of jobs’ and workers’ availability. And this cooling is consistent with the gradual slowing of wage growth that we’ve seen. In addition, there has been a notable slowdown in payroll employment growth in recent months, but this is likely the result of lower growth in both demand and supply, reflecting in large part the effects of reduced immigration on the labor force." – Federal Reserve Bank of New York President John Williams

Many of the hardest hit industries are the blue-collar sectors that the president vowed to reinvigorate with the dawn of a new “golden age” in America, but which have been hit disproportionately hard by his tariffs as many companies freeze hiring.

August lay-offs were among the highest in the goods-producing sectors most exposed to the trade upheaval, with manufacturing, construction and energy and mining losing a combined 25,000 jobs. Wholesale trade was also hit hard, shedding 12,000 roles.

Immigration and Customs Enforcement is now deporting people at a rate of about 1,500 immigrants a day, and has deported about 180,000 under Trump so far. That grows to 332,000 with the inclusion of Border Patrol removals at or near the border, according to the Department of Homeland Security. Stephanie Kramer of the Pew Research Center, which used preliminary Census data to calculate the 1.2 million missing workers, said it was unclear how many others left voluntarily but said “we don’t believe that the preliminary numbers … are so far off that the decline isn’t real.”…

The Pew analysis showed that immigrants make up nearly 20% of the US workforce. An estimated 45% of workers in farming, fishing and forestry are immigrants, along with 30% of construction workers and 24% of service workers. In the health industry, immigrants make up nearly a third of home health aides and more than a fifth of nursing home workers.

Modelo Especial and Corona owner Constellation Brands Inc. cut its full-year guidance as Hispanic consumers are spending less on high-end beer.

The company now sees organic net sales falling 6% to 4% in the fiscal year, compared with an earlier outlook that saw sales growth of as much as 1%. Expectations for earnings per share were also lowered…

“High-end beer buy rate declines for Hispanic consumers were more pronounced than general market declines,” Constellation Brands President and Chief Executive Officer Bill Newlands said in a statement.

The company had previously said that more than half of Modelo drinkers are Hispanic, and they are spending less on concerns about immigration crackdowns.

@RenMacLLC: Job finding is the risk in the labor market. According to the NY Fed SCE, the probability of losing a job remains relatively low. However, the mean probability of finding a job if you lose one today plunged to 44.91%, a level never before seen in the history of this survey. ‬‬

US data weakening sufficiently to allow Fed to cut credibly…July construction spending down 2.8% YoY (despite AI data center boom = 6% of total $2.1tn) and rate-sensitive recessionary right now (Chart 3), US house prices down in past 4 months, JOLTS labor market data consistent with lower Fed funds (Chart 5), AI jobs disruption starting (graduate unemployment rate up 4% to 8% past 18 months)

@edclissold: Small-caps have been more sensitive to changes in interest rates because they have so many unprofitable firms that rely on short-term debt. Hope for rate cuts likely behind the rally but the lesson from 2024 is small-caps need an extended easing cycle for the rally to last.

@KevRGordon: 14 mentions of tariffs in the August ISM Manufacturing comments section

Take the administration’s widening of steel and aluminum duties to include hundreds of categories of consumer items and manufacturing inputs, from motorcycles to baby gear. Importers must be able to document not just the value of metals contained in the goods, but also where the steel was poured and the aluminum smelted, according to customs broker Pete Mento.

Even when a product like deodorant sprays or shampoo doesn’t contain any listed metals, importers can be required to submit documents that prove it.

In the case of aluminum, if importers can’t prove the origin, customs officials will assume it’s from Russia – which has the highest rate — and charge 200%. Russia is likely the ultimate source of metal used in many products that arrive via third countries, but some suppliers don’t want to share the information, or perhaps even have it in the first place.

“It’s death by a thousand papercuts,” said Shannon Bryant, president of trade compliance advisory service Trade-IQ.

Caterpillar is now expecting tariffs to have a greater impact on its finances.

The construction and mining manufacturer said Thursday it now expects the net impact from tariffs to be $1.5 billion to $1.8 billion this year, up from a previous range of $1.3 billion to $1.5 billion.

In the third quarter, it anticipates costs to be $500 million to $600 million, up from $400 million to $500 million.

As a result, Caterpillar expects its full-year adjusted operating profit margin will be near the bottom of the target range it gave previously. The new tariff costs aren’t expected to weigh on its sales outlook…

“While the Company continues to take initial mitigating actions to reduce this impact, trade and tariff negotiations continue to be fluid,” Caterpillar said in a filing with the Securities and Exchange Commission.

Lululemon Athletica Inc. says the end of the de minimis exemption will hurt its gross margin more than tariffs.

The yogawear retailer, which has been struggling to keep sales momentum up, warned Thursday that it would take a $240 million hit this year from President Donald Trump’s decision to end the de minimis exemption and from higher tariffs.

De minimis — which loosely translates as “too small to matter” — refers to small packages shipped directly to consumers from abroad, millions of which arrive in the US every day. A shipment that qualified as de minimis came with big perks, including no duties.

Based in Vancouver, British Columbia, Lululemon relied heavily on the de minimis exemption, shipping two-thirds of its US e-commerce orders from Canada. Most of those orders are under $800, so they qualified for the policy.

Holiday spending in the US is poised to decline this year due to Gen Z’s concerns about rising prices, tariffs and a higher cost of living, according to a survey by PricewaterhouseCoopers.

A report released Wednesday shows consumers expect to cut their seasonal spending by about 5% on average compared with 2024. That would mark the first notable drop since the pandemic hit in 2020, PwC said…

More than eight in 10 shoppers surveyed in June said they planned to cut back on their spending over the next six months. The biggest pullback was seen among Gen Z respondents ages 17 to 28, who expect to trim holiday spending by 23%. On the other hand, millennials, Gen X and Baby Boomers said they’ll shell out about the same or more than last year.

A new $250 "visa integrity fee" imposed on travelers to the United States risks piling more pressure on the struggling travel industry, as overseas arrivals continue to fall due to President Donald Trump's crackdown on immigration and hostility to many foreign countries…

The new visa fee, set to go into effect on October 1, adds an additional hurdle for travelers from non-visa waiver countries like Mexico, Argentina, India, Brazil and China. The extra charge raises the total visa cost to $442, one of the highest visitor fees in the world, according to the U.S. Travel Association, a membership organization.

"Any friction we add to the traveler experience is going to cut travel volumes by some amount," said Gabe Rizzi, President of Altour, a global travel management company. "As the summer ends this will become a more pressing issue, and we'll have to factor the fees into travel budgets and documentation."

ConocoPhillips said: “We are always looking at how we can be more efficient with the resources we have. As part of this process, we have informed employees that a 20 to 25 per cent reduction in our global workforce, which includes employees and contractors, is anticipated.”

The cuts at ConocoPhillips are the latest across the oil and gas sector, as producers race to streamline operations following a 12.5 per cent fall in crude prices this year.

BP last month said it planned to reduce its 40,000 office staff by at least 15 per cent. Chevron in February announced it would cut a fifth of its employees…

Michael Alfaro, chief investment officer at Gallo Partners, said ConocoPhillips’ latest workforce cuts were the result of a squeeze from mounting cost pressures and declining oil prices.

“Inflation is biting hard at the corporate level, especially for Conoco, where production costs are running about $13 a barrel, roughly $2 higher than its competitors.”

Trump in June increased tariffs on most steel and aluminium imports from 25 per cent to 50 per cent, increasing the costs of infrastructure and equipment such as pipelines and drilling tools.

@DataArbor: A bumper crop of concern? U.S. farmers have not sold any current soybeans to China after the tariff on the U.S. crop.

Mark Belter farms corn and soybeans on 8,000 acres in eastern North Dakota. He has spent years expanding the size and scale of his farmstead in an attempt to cut costs and turn a profit.

Belter still can’t make enough money. He lost $400,000 last year. He is relying on getting about $200,000 back as part of Congress’s $10 billion farmer bailout passed in December. This year could be more of the same as crop prices are whipsawed by President Trump’s trade battles, including with big buyers of U.S. crops such as China. So far, Chinese buyers haven’t bought any U.S. soy from the coming harvest.

“We don’t like to get government handouts, but we don’t like to go broke either,” Belter said. “It’s a tough time in row-crop production.”

Over the past five years, China has imported on average about 61% of the world’s available soybean supplies. Securing large quantities of soybeans became critical for China during the 1990s as the country’s growing middle class developed a taste for pork and poultry, which are fed on soybean meal.

“U.S. soybean farmers cannot survive a prolonged trade dispute with our largest customer,” wrote Caleb Ragland, a Kentucky soybean farmer and president of the American Soybean Association, in an August letter to Trump.

Roughly 60% of the $45 billion in soybeans, meal and soy oil produced in the U.S. annually is exported. America’s share of global corn exports dropped to 33% in 2024 from 59% in 2004, because of the lingering effects of Trump’s trade wars and increased competition from other nations.

According to The Information, OpenAI now projects a total cash outflow of $115B through 2029—about $80B more than earlier forecasts, which had the company reaching break-even by then. The burn rate is accelerating: OpenAI expects to go through more than $8B this year, with spending climbing to $17B in 2026. By 2027, costs are set to hit $35B, then jump to $47B in 2028. At the start of the year, OpenAI was only projecting $11B in spending for 2028.

The main reason for these numbers is the soaring cost of computing power needed to train and run OpenAI's models, along with a major push to build out its own server infrastructure. The company plans to invest nearly $100B in data centers and custom chips by 2030, hoping to cut its dependence on outside cloud providers and lower costs over time.

Training foundation models keeps getting more expensive. OpenAI expects to spend over $9B on training alone in 2025 - about $2B more than it had budgeted. By 2026, that figure could reach $19B. Meanwhile, ongoing inference costs could top $150B by 2030.

Personnel costs are climbing, too. OpenAI is setting aside about $20B in extra stock compensation through 2030 to stay competitive in the race for top AI researchers and engineers. The fight for AI talent is heating up, with Meta reportedly offering nine-figure deals to lure away leading experts.

Data centers are desperate to connect to the U.S. electric grid. What remains fuzzy is how many will ultimately be built and how much electricity they will require.

U.S. utilities are reporting a sharp upswing in interconnection requests from prospective data centers that will need an extraordinary amount of electricity to power America’s artificial-intelligence race. In some cases, the collective requests equal or surpass—by multiples—the existing electricity demand in a utility’s entire service region.

Take American Electric Power, a big utility that serves 11 states, and Sempra’s Texas utility Oncor. Combined, they have received requests to connect projects, many of them data centers, to the grid requiring almost 400 gigawatts of electricity. That is an astronomical amount that represents more than half the peak electricity demand in the Lower 48 states on two hot days in July.

Part of the problem is the electricity needs of the same potential projects are being double, triple or quadruple counted by different utilities. Data-center developers and tech companies are peppering utilities around the country with requests for service while scouting locations where they can quickly construct massive data centers and connect to the grid.

"As we've talked to the U.S. administration around tariffs, they obviously would like us to build a smelter in the U.S. We've made clear to them though that one of the key components to that is having -- the U.S. having an industrial energy policy. We are now today competing with Amazon and Microsoft who are willing to pay over $100 per megawatt hour for power. But to run an economical smelter, we need to be down in that $30 range. So they absolutely have some willingness and openness to address that not in the near term. But I think you could see projects possibly in the U.S. or North America if we can get the energy for it." – Alcoa CFO Molly Beerman

@TheTranscript_: Meanwhile, Buffett, in 2018, speaking about leverage: "My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage. Now the truth is — the first two he just added because they started with L — it’s leverage...It is crazy in my view to borrow money on securities"

Puerto Rico’s economy is getting a bump from Bad Bunny.

The award-winning Puerto Rican rapper’s three-month, 30-show concert series in San Juan is spurring a fan-fueled surge in the island’s economy at a time of year when tourism is usually slow.

During the Atlantic hurricane season, which runs June through November, tourism usually drops by 25 percent to 45 percent, and lodging prices fall by as much as 50 percent, according to the tourism agency Discover Puerto Rico. Tourism accounts for about 7 percent of Puerto Rico’s $114 billion economy.

Bad Bunny’s residency, which ends Sept. 14, is expected to draw an estimated 600,000 attendees and to have a direct economic impact of $250 million, according to Moody’s Analytics. It estimated that total spending, which includes purchases not directly related to shows, will top out at $400 million.

Bad Bunny’s home stay is ahead of an eight-month world tour beginning in December and comes on the heels of global mega-tours that have become a playbook for chart-topping artists. Taylor Swift’s Eras tour grossed more than $2 billion in ticket sales, and Beyoncé’s Cowboy Carter tour brought in $407 million. Bad Bunny’s 2024 world tour took in $208 million.

Moody’s recently raised its 2025 economic forecast for Puerto Rico to 0.4 percent, from 0.3 percent, partly because of the residency. Jesse Rogers, the head of LatAm Economics at Moody’s Analytics, said if his team members were not Bad Bunny fans, “we would have probably missed this.”