(Dot) Plotting A Course For Stagflation

The Macro Institute's Weekly Economic Primer

Author

The Macro Institute
June 23, 2025

In partnership with

This week brings a wave of important economic data including potential early signals on where the labor market and inflation are heading.

We’ll be closely watching Tuesday’s Richmond Fed Index and Thursday’s Kansas City Fed Index. Regional PMIs are always on our radar, but this month they take on added significance. Last week’s Philly Fed Index showed a sharp deterioration in the employment outlook. That’s notable, especially given how leading indicators of employment have recently been sending either weak or conflicting signals. We'll be zeroing in on the employment components of these two upcoming PMIs to see whether the Philly reading was an outlier or the start of a broader trend.

Also on deck: Tuesday’s release of Consumer Confidence from the Conference Board and Friday’s print of the Michigan Consumer Sentiment Index for June. If tariffs are beginning to shift consumer psychology in a meaningful way, we’ll likely see it start to emerge here.

Finally, we’re watching the April Case-Shiller Home Price Index for clues on shelter inflation, which is a key driver of CPI.

The Macro Week In Review

Outsmart college costs

Ready for next semester? June is a key time to assess how you’ll cover college costs. And considering federal aid often isn’t enough, you might have to consider private student loans.

You’re just in time, though—most schools recommend applying about two months before tuition is due. By now, colleges start sending final cost-of-attendance letters, revealing how much you’ll need to bridge the gap.

Understanding your options now can help ensure you’re prepared and avoid last-minute stress. View Money’s best student loans list to find lenders with low rates and easy online application.

The Macro Week Ahead

🗺️ (Dot) Plotting A Course For Stagflation

Last week’s FOMC meeting stuck to the script. Rates were held steady at 4.25%-4.50% and Chairman Powell walked a fine line between being dovish and hawkish. On the one hand, inflation is near the Fed’s 2% core PCE target, but on the other, the labor market remains tight with unemployment at 4.2%.

The wildcard for the second half of 2025 is tariffs. They have the potential to either weaken the labor market (pushing policy dovish) or push prices higher (forcing a hawkish pivot). The latest Summary of Economic Projections from the Fed reflects this uncertainty:

  • 2025 Real GDP: 1.4% (down from 1.7% in March)

  • Unemployment: 4.5% (up slightly from 4.4%)

  • Core PCE: 3.1% (up from 2.8%)

Despite this, the Fed still signals two rate cuts this year, unchanged from March, though the distribution of votes has edged more hawkish. With political pressure to cut rates mounting, the Chairman is waiting for more post-tariff economic data to confirm that policy is indeed restrictive, and cuts are warranted. With the economy running hot and labor markets tight, our leading inflation indicators suggest that the market’s expectation for 50 bps of cuts may prove too dovish.

💪 Soft Vs. Hard Data: New Trends Emerging?

Economic surveys and sentiment data took a hit in February as tariffs moved from talk to reality and then tumbled further in March and April. Lately, soft data like PMIs and consumer confidence have rebounded modestly (from a very low bar).

Meanwhile, the hard data has held up… until mid-May. Since then, labor market figures, retail sales, and industrial output have started to disappoint. One possible conclusion is that the tariff uncertainty that first rattled sentiment is now showing up in the fundamentals that feed directly into company earnings and GDP.

While the scale of downside surprises in hard data is still modest compared to past cycles, the divergence between soft and hard indicators bears close watching as fresh June data rolls in.

⛈️ It’s Always Sunny In Philadelphia?

We view the Philly Fed as one of the better regional PMIs, and June’s headline reading matched May’s at -4.00, unchanged to two decimal points. Empire Manufacturing for June weakened, at -16 versus -9 in May.

Both signals remain contractionary, but the New Orders components improved notably after April’s sharp drop. Cost pressures are cooling month-over-month, but supply chains still face elevated costs, and that’s before the full tariff impact hits.

Next up: S&P Global’s preliminary US Manufacturing PMI (Monday, consensus = slight drop to 51), plus the regionals from Richmond (Tuesday) and Kansas City (Thursday). As always, expect choppiness in month-to-month PMI data.

🛍️ Consumers & Inflation: What To Watch

Tuesday brings the Conference Board’s June Consumer Confidence. After April’s plunge to GFC-era lows (later revised up), recent University of Michigan data suggests confidence is stabilizing. Inflation expectations are moderating too: the Conference Board’s one-year outlook dropped to 5.3% in May (from 5.9% in April). Michigan’s comparable reading eased to 5.1% in June.

These expectations set the stage for Friday’s May Core Personal Consumption Expenditures (Core PCE), a key Fed input. April’s reading was 2.5% and May is expected at 2.6%. This input still does not include all the potential impacts from tariffs we'll see hitting throughout the summer. Remember the Summary of Economic Projections (referenced above) suggests the Fed thinks this number heads north of 3.0% by the end of the year.

The Fed’s projections are driven in part by sticky housing services inflation, which peaked at 8.5% in mid-2023, and while falling, remains over 4%. Given the lag time in resetting rent prices, it takes longer for disinflation to flow through from the housing component versus other inflation drivers. This continues to put a floor under PCE and complicates hitting the 2% target.

Bottom line: Tariffs and tight labor markets are muddying the outlook. We’re watching how quickly fiscal uncertainty and cost pressures feed into real economic data and how much tolerance the Fed has for stagflation risk in the months ahead.

Macro Job Board

Seeking a Macro Analyst on a global macro strategy team that focuses on top-down alpha-generating investment insights across the firm’s asset classes. This position will contribute to developing applied economic frameworks and translating macro views to asset allocation strategy across and within the firm’s asset classes.

Expected to monitor, gather, and analyze macroeconomic and financial markets data. Will assist senior analysts in idea generation and the production of KBRA Strategist research reports, presentation slides, and decks.

This position will analyze portfolio and trade-level risk across macro strategies and working closely with select fixed income and macro portfolio managers and their teams to understand and analyze their portfolios and risks.

What We Read This Weekend