MICHEL MARTIN, HOST:
Given all this, we're going to zoom out a bit for a broader look at the U.S. economy. We called Mary Lovely for this. She's a senior fellow at the Peterson Institute for International Economics, which is a nonprofit, nonpartisan research institution. She's with us now. Good morning, Mary.
MARY LOVELY: Good morning.
MARTIN: So we just heard Alina talk about companies like Walmart warning of higher prices due to President Trump's tariffs. How significant is that warning, and what do you think it means for the economy?
LOVELY: Well, I think it's very significant. And Walmart, of course, is a place where you find a lot of traded goods, and we're seeing enormous pressure on the prices of traded goods because of President Trump's tariffs.
MARTIN: Traded goods being...
LOVELY: Anything that we import in large quantities and their domestic substitutes because domestic prices rise when foreign prices rise because U.S. producers are able to expand, and they do so to fill in the gap.
MARTIN: And what does it mean for the economy?
LOVELY: For the economy, it means that we're probably facing higher inflation. We saw last month - actually, August - that consumers view the inflation that's ahead of them as higher than what the Fed would like. It rose to 4.9%. So consumers are feeling this. They don't see their wages keeping up, and people are starting to worry. How are they going to handle these price increases moving forward?
MARTIN: And just briefly, if - you know, if a big retailer like Walmart with presumably a lot of buying power in the marketplace is saying it can't absorb all the tariff costs forever, what does that say about smaller businesses and how they might be able to cope?
LOVELY: Well, many small businesses are hit in two ways. Some of them will see higher prices because domestic competition, you know, is hindered by the tariffs. But for many of them, they're seeing the prices of the goods they use to produce go up. So, for example, if you're a small boat manufacturer and you import the electric motor that goes in your boat, you're going to see that electric motor price increase. Or if you make knitted supplies, you're going to see the price of wool and other goods go up. So small businesses, actually, have been telling reporters for quite some time that the tariffs are hurting them.
MARTIN: So do you think that we are at an inflection point in the economy? And if so, what data points would you be looking at to determine that?
LOVELY: Yeah, I believe that Alina said we're in suspended reality. We're on the verge of something. We're not quite sure what it will be. I think this is the problem that's facing the Fed. GDP growth was a little higher in the second quarter of this year. But overall, for 2025, it's pretty anemic. It's 1.2%. Imports have fallen. Exports have fallen. Prices are up. Uncertainty is way, way up. We're seeing consumers, particularly at the lower end of the income distribution, really struggling. Interestingly, about 15% of all home sales agreements were canceled last month. That's very high. It suggests that people become very uncertain when they're trying to make big spending decisions about whether they'll have the income to support that spending. About a quarter of all student loans are late or in default. So many people are beginning to experience, you know, real struggles with their income. Employment has stalled. So if people don't see that their job prospects are steady, have confidence that they're going to remain employed, the economy starts to sputter.
MARTIN: You know, President Trump campaigned on the promise to lower prices for Americans, and, you know, some prices have come down. But what's your assessment overall of the reality of what his policies - or the impact of his policies on prices?
LOVELY: Well, one of the big prices that's come down is energy, and energy prices are very volatile. They go up. They go down all the time. The Fed often looks at what's called the core CPI, which strips out energy and food prices, and that was up 3.1% in July. So we are seeing pressure on prices. The producer price index - which, you know, catalogs what happens with the prices that producers pay - was up 3.3%. So there is concern about prices going up. At the same time, there's these pressures, which I noted earlier, about jobs and GDP.
So as the Fed is considering what to do with interest rates, you have to realize that they're - have this dual mandate to maintain price stability and to keep the economy growing, and yet those two things are out of sync right now. There is a fear of what we have called - for those of us who were alive in the 1970s - stagflation, where the economy fails to grow or even falls into recession. And at the same time, we see inflation ticking up. So most economists don't see a recession on the near horizon, but it seems pretty hard to not look at the data and conclude that the economy is really starting to slow.
MARTIN: Yeah.
LOVELY: And that's why people say it's an inflection point.
MARTIN: So before we let you go, we only have about 30 seconds left. But the Fed chair, Jerome Powell, is speaking to economists and central bankers in Jackson Hole, Wyoming, today. What are you going to be listening for?
LOVELY: Well, everybody, of course, will be hanging on his words about the state of the economy and if he throws some hints as to which way the Fed is leaning in terms of these interest rate cuts that are widely expected. But we'll also look to see whether he talks about the need for accurate economic data. People will remember that the - that President Trump fired the chief labor statistic. And then also whether he'll talk about Fed independence from political pressure.
MARTIN: That is Mary Lovely. She's a senior fellow with the Peterson Institute for International Economics. Mary Lovely, thanks so much for joining us.
LOVELY: You're welcome. Transcript provided by NPR, Copyright NPR.
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