If Consensus Is Right on Economy, 10-year Treasury Yield Drops Under 4%
Second half outlook calls for slower growth, fewer new jobs, and faster price inflation …
If I were to rate the outlook on a scale from 1 to 10, where 10 is very optimistic, I would assign a score of 4.
Regardless of what becomes of Iran nuclear weapons program the never-ending tariff saga, I’m cautious because of the following reasons:
More than the rent is “too damn high” …
Yes, the rate of price growth has slowed, but prices, including property taxes and insurance premiums, remain elevated. Consumers are also getting fed up with “shrinkflation” or selling less product for the same price.
The unexpected drop by June’s consumer confidence index reflects consumer dissatisfaction with the cost of living. By calendar-quarter averages, the consumer confidence index dropped from Q2 2024’s 98.9 points and Q1 2025’s 98.8 points to Q2 2025’s 92.4 points. The latter was the lowest quarterly average since the COVID recession.
Consumer expectations index has signaled recession for some time …
According to the Conference Board, a recession typically follows whenever the expectations component of the consumer confidence index is less than 80 points. June 2025’s consumer expectations index score of 69.0 points was the fifth straight month showing an expectations index of less than 80 points.
Moreover, a recession has yet to arrive despite how the expectations index averaged 75.9 points during the 28 months ended June 2024. More specifically, the consumer expectations index was less than 80 points in 22 of the 28 months ended June 2024.
Wage growth has been scant. Wage and salary income rose by only 4.3% annually through the first four months of 2025, which was down from the 6.6% annual increase of the first four months of 2024. On the bright side, the eventual inclusion of performance-linked bonus income will later provide a lift to the wage and salary income of January-April 2025.
Another episode of home price deflation arrives …
The restoration of affordability for first-time homebuyers will require lower home prices. After March 2025’s -0.2% month-to-month dip, the seasonally adjusted version of the widely followed Case Shiller home price index for 20 cities fell by another -0.3% in April. The last episode of Case-Shiller home price deflation occurred during the eight months ended February 2023, or when the 20-city home price index fell by a cumulative -3.6%. I sense the unfolding slide by home prices will be longer and deeper.
Housing is now grossly overvalued relative to wage and salary income. For the year-ended March 2025, the market value of owner-occupied residential real estate was at 3.86-times wage and salary income. The latter was well above the 3.14-times average of 2018-2019 and was close to Q3 2006’s record high of 3.96-times.
Following Q3 2006’s zenith, home prices entered into an extended slide. The Case Shiller 20-city home price index would plunge by a cumulative -35% from its 2006 peak to its 2012 bottom. The market value of owner-occupied residential real estate eventually bottomed at the 2.63-times wage and salary income of the year-ended December 2012.
Today’s near record high ratio for the market value of housing relative to wage and salary income warns potential homebuyers to exercise extreme caution when assessing whether to purchase a residential property.
Home prices are only part of the affordability problem. Housing costs are on the rise in terms of utilities, maintenance, property taxes, and insurance premiums.
Recent college grads would dispute claims of solid job market …
Recent college grads have difficulty securing suitable employment. Job growth has been skewed towards healthcare, social work, leisure, and hospitality.
Artificial intelligence (AI) may have reduced the number of entry level jobs in information technology, law, accounting, and finance. However, mastery of AI may boost an individual’s productivity considerably. But too much of a reliance on AI during an individual’s formative years may retard intellectual development.
Nonsupervisory jobs and wages lead economy …
Jobs grow more rapidly in nonsupervisory positions (up 1.1% yearly in May) compared to supervisory jobs (up 0.8% in May).
May’s average hourly wage for blue-collar construction and manufacturing jobs was up by 4.7% yearly. May’s average wage for nonsupervisory workers in private education and health services advanced by 4.3% yearly.
All private-sector wages rose by 3.9% year-on-year for May, wherein the average wage of nonsupervisory workers grew by 4.0% and the average wage of supervisory personnel rose by 3.6%.
Private education and healthcare supply 72% of new nonsupervisory jobs …
Nonsupervisory jobs supplied 1.25 million, or 86%, of the 1.46 million jobs added to private sector payrolls during the 12-months-ended May. Moreover, private education and healthcare accounted for 899,000, or 72%, of the 1.25 million nonsupervisory jobs added during the year-ended May.
Recent good inflation news is widely expected to be followed by faster price growth. Near-term inflation expectations are troubling. Almost all qualitative surveys of businesses indicate a climb by costs that resembles what occurred during first-half 2021’s start to the latest episode of disruptive price inflation.
The impact of tariffs on consumer prices may not become known with confidence until the July CPI is released in mid-August. A Fed rate cut may not occur until the FOMC’s September 17 meeting at the earliest.
Both the FOMC and private-sector forecasters predict a subpar second half …
Both the FOMC and Blue-Chip survey of 48 professional prognosticators look for slower growth and faster price inflation during 2025’s second half.
Blue Chip consensus has US real GDP slowing to 0.7% yearly by Q4 2025 …
Early June’s Blue-Chip consensus expects a sluggish second half. The consensus believes real GDP’s annualized quarter-to-quarter growth rate will average a mere 0.7% in the third and fourth quarter of 2025. Reflecting meager sequential growth, the consensus also sees real GDP’s year-on-year growth rate dropping from Q1 2025’s 2.1% to a puny 0.7% for Q4 2025.
Consensus predicts climb by unemployment will curb consumer spending …
Consistent with predictions of decidedly subpar economic growth, the Blue-Chip consensus expects the average unemployment rate will increase from Q1 2025’s 4.1% to 4.6% by 2025’s final quarter. Forecasts of a rising jobless rate complement the consensus expectation of a marked deceleration by real consumer spending’s year-on-year growth rate from Q4 2024’s 3.1% and Q1 2025’s 2.9% to 1.0% for 2025’s final quarter.
If realized, the latter would be the most pronounced deceleration by the yearly growth rate of real consumer spending since the metric sank from the 2.8% of 2010’s final quarter to the 1% of 2011's final quarter.
The pronounced slowdown by real consumer spending helped lower the 10-year Treasury yield’s month-long average from an April 2011 high of 3.46% to the 1.98% of December 2011.
Though a composite high-yield bond spread ballooned from a fourth quarter 2010 average of 569 basis points to the 751 basis points of 2011’s final quarter, the S&P 500 correctly foresaw 2012’s return of quantitative easing and managed to finish 2011 unchanged from its end of 2010 mark.
FOMC is less pessimistic than Blue Chip consensus …
The FOMC is less pessimistic than the Blue-Chip consensus. The FOMC’s latest projection has Q4 2025’ real GDP up by 1.4% year-on-year, which doubles the consensus forecast of a 0.7% yearly rise. The FOMC also sees the jobless rate averaging 4.5% during 2025’s final quarter.
Beautiful resolution of trade issues would improve outlook …
Both the FOMC and Blue Chip partly attribute expectations of a subpar second half to projections of a tariff-driven upturn by price inflation. Compared to Q1 2025’s 2.8% yearly increase, the Blue-Chip consensus expects the annual rate of core PCE price index inflation to accelerate to 3.4% by Q4 2025, while the FOMC predicts a comparably measured rate of 3.1%.
Equity market’s revenue outlook at odds with GDP views …
As of June 13, the FactSet survey of corporate earnings analysts had the yearly increase of S&P 500 revenues rising from Q1 2025’s 4.9% to Q4 2025’s 5.2%. The projected quickening of S&P 500 revenue growth is at odds with projections of slower real GDP growth from both the Blue-Chip consensus and the FOMC.
Despite the FactSet consensus forecast of somewhat faster revenue growth, the same group predicts a deceleration by S&P 500 earnings growth from Q1 2025’s yearly advance of 13.3% to a Q4 2025 increase of 6.2%.
Outlook for Q2 2025’s S&P 500 earnings worsens considerably …
If the Blue Chip and FOMC views on 2025’s second half prove correct, the equity market’s outlook for Q4 2025’s revenues and profits will be revised lower. After all, compared to the earlier forecasts made on March 31, 2025, the FactSet consensus has lowered its projections for Q2 2025’s S&P 500 revenue growth from 4.7% to 4.1% and Q2 2025’s S&P 500 earnings growth from 9.3% to 4.9%.
Only two of the S&P 500’s 11 corporate groups may post earnings growth above 4.9% …
It is very much worth mentioning that of the S&P 500’s 11 broad corporate categories, only two – communication services and information technology – are expected to realize profits growth above the 4.9% now projected for the second quarter’s entire S&P 500. (Communication services include Alphabet (Google), META, and Netflix)
The median year-on-year growth rate for Q2 2025’s profits across the S&P 500’s 11 corporate groups is a mediocre 1.6%.
Five of the corporate groups are expected to incur a shrinkage of earnings …
Five of the S&P 500’s 11 corporate groups are projected to incur yearly contractions by profits in the second quarter. The five and their respective expected yearly declines by profits are industrials (-0.1%), consumer staples (-3.0), materials (-3.6%), consumer discretionary (-5.1%), and energy (-26.1%).
The ongoing deceleration by economic activity and corporate earnings may not end until Iran gives up on developing nuclear weapons, tariff issues are resolved, the Fed cuts rates, and the 10-year Treasury yield sinks under 3.75%.
VIX again takes direction from thin credit spreads …
The credit market continues to show well above average levels of confidence in corporate debt repayment capabilities. According to the high yield market, the perceived risk of junk bond defaults remains on the low side.
Thus far, the high-yield bond spread has outperformed the VIX as far as assessing the risk of a disruptive contraction of corporate earnings.
Unlike the earlier drop in share prices and jump by VIX, the Iranian crisis failed to prompt a material sell-off of earnings-sensitive, high-yield bonds. After Israel struck Iran’s nuclear bomb infrastructure, a composite high-yield bond spread closed no higher than June 13’s 325 basis points (bp), which was far less than the spread’s long-term median of 434 bp. The high-yield bond spread subsequently narrowed to June 25’s 309 bp.
Meanwhile, the VIX closed no higher than June 19’s 22.2 points following the outbreak of the Iranian nuke crisis. Though the latter was above its long-term median of 16.6 points, it was well under its tariff-driven 52.3-point high of April 8, 2025. In response to tariff uncertainties, the high-yield bond spread closed no higher than April 7’s 470 bp.
The VIX has since eased to June 26’s 16.7 points, which matches its long-term median. If the high-yield bond spread stays well below its long-term median, a further decline by the VIX is possible. An even lower VIX might well be joined by new record highs for the S&P 500.
Mamdani’s victory says voters believe government can cut high cost of living …
Middle- and lower-income consumers are not getting much relief on the price front. Zohran “the socialist” Mamdani first-round trouncing of Andrew Cuomo (43% to 36%) in New York City’s Democratic Party mayoral primary owes much to onerous living costs. In the November 2024 congressional and presidential elections, voters assigned a much higher priority to making America affordable again, as opposed to reviving manufacturing via tariffs. Tax incentives, deregulation, and federal subsidies may revive manufacturing more effectively and efficiently than tariffs.
Who voted for Mamdani? According to Politico, even “affluent, highly educated white voters from Brooklyn and Queens” were drawn to Mamdani’s populist (or socialist) policies. (Politico correctly implies there isn’t much of a difference between populism and socialism regarding economics.) Apparently, “affluent, highly educated white voters from Brooklyn and Queens” are more than happy to pay higher taxes, or are under the mistaken belief that the even wealthier inhabitants of “billionaires’ row” and the Upper East Side will pick up the tab. By the way, government-run grocery stores will be rife with corruption, graft, and inferior merchandise.
Politico also noted East Asian, South Asian, and Muslim voters were drawn to Mamdani. Many of these voters leaned toward moderate candidates in previous elections.
Mamdani exceeded expectations with Hispanic voters.
Cuomo’s only strength was with Black voters.