Economic update: October 2025

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

• US Fed reactivates interest rate cutting cycle.

• Big downward revision to US jobs data.

• The legality of Trump’s tariffs has been challenged and is to be adjudicated by the Supreme Court.

• RBA did not cut interest rates due to slightly stronger inflation data.

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

THE BIG PICTURE

After immense pressure from President Trump, the chairman of the US Federal Reserve (“Fed”), Jerome Powell, announced a 0.25% cut in the Fed funds interest rate to a range of 4.00% to 4.25% at its September meeting. Not only did the Fed cut interest rates, but it also signalled another two rate cuts this year and one in each of the next two years.

We have long argued that the Fed rate was far too high for current economic conditions. Powell may well have privately agreed but we suspect he didn’t want to be seen to be running a Fed that was not independent from the government.

There seem to have been two trigger points. We reported last month that there was a big revision to the previous two months’ new jobs data and a lower-than-expected number for the latest month (at the time). September’s release was a paltry 22,000 new jobs, and the unemployment rate inched up to 4.3%! Less than a week later, the BLS (Bureau of Labour Statistics) that produces much of the government economic data reported its annual revision to the recent twelve-month period (April 2024 to March 2025) was a downward move of 911,000 jobs. In the previous year, the BLS reported a downward revision of 818,000 jobs. That revision prompted Trump to accuse the BLS of being politically motivated – hiding poor data before the run-up to the November 2024 election. Trump’s claim was that the BLS wanted to support a Biden victory. That revision also heralded in a 0.5% Fed cut in September 2024 to start a new rate-cutting cycle.

We have seen no reasonable evidence that the BLS has done anything other than the best job it can in difficult circumstances. The nature of work and jobs are changing, and the response rate to the BLS monthly telephone surveys has been declining rapidly since the pandemic – as has also been reported response rates in Australia and Britain.

The problem of monitoring the labour market going forward has been exacerbated by the government shutdown in the US that just started on October 1st for an indeterminate time. There have been 14 such shutdowns in four decades – it is the way the two major parties try to direct funding to their chosen projects. The shutdown allows the president to choose which departments he will shut down. It is widely believed Trump will shut down the BLS before the next jobs’ data, due on October 3rd, to prevent more poor data from being published. We do not think a lack of data will divert the Fed from its cutting cycle, and market pricing supports this view.

US June quarter GDP growth was revised upwards to 3.8%, making for an average 1.6% p.a. for the first half of the year. Volatile trade data, caused by changing news on tariffs, continues to hamper estimating current growth. We think the US is likely to be growing at below trend, but that it is unlikely to go into recession anytime soon.

US inflation data remains a little elevated – currently running at 2.9% pa. Since tariffs have contributed to rates being above the target 2%, there is no reason to change monetary policy to accommodate these small changes. The tariff effect will only be transitory unless it inspires workers to escalate wage demands. With a weak jobs’ market, inflation is not a problem.

Some commentators are calling the current situation ‘stagflation’. We see this claim to be a headline-seeking activity. The term was introduced in the 1970s when unemployment and inflation were both high. Inflation was well into double digits and unemployment rates were about double what they are now.

Trump is still announcing lots of new tariffs, but with so many conditions that it is not feasible to keep up with what is real and what is not. The US Appeal Court found Trump’s across-the-board tariffs to be illegal. Trump has petitioned the Supreme Court to overturn that ruling – and to do that quickly.

Apparently, reasonable legal experts have stated that only Congress can impose across-the-board tariffs, but there are so many variations on what Trump might do if the ruling goes against him, it is not wise to speculate on what might happen next.

What is clear about the tariffs is that the US consumer and US businesses are bearing the brunt of tariffs – which are simply taxes by another name. There is no credible evidence that the exporters to the US are cutting prices to share the tax burden. However, that does not mean exporters are not shifting their exports to other markets to replace lost revenue from previous US imports.

China has turned out to be an awesome opponent in the tariff war. The deadline for a ‘deal’ keeps getting pushed back. China has a near monopoly on rare earth minerals, which are crucial in manufacturing high-tech goods such as EVs, drones, and military equipment. China has resumed exporting some rare earths to the US, but it is keeping a tight rein on where the minerals go. China is still in a position to cause serious economic damage to the US by withholding supply.

China has also stopped importing soybeans from the US – not because there is a tariff on them, but in an act of retaliation. Other examples exist.

Last year, the US exported half of its production of soybeans to China. Brazil has now replaced that supply. When Trump imposed similar tariffs in his first term, the US lost about 20% of market share to Brazil and never recovered.

US farmers are hurting, and Trump is offering $23bn of tariff revenue to compensate farmers. The problem is that the tariff revenue is being sourced from US consumers and businesses.

Other Trump policy initiatives are under fire. Courts also ruled against many of the mass deportations, but Trump seems to be following this ruling as he has now realised deportations are affecting employment and economic growth.

At home, the RBA is seemingly having difficulty interpreting inflation data. The problem lies squarely with our data agency, the ABS, and how it adjusted electricity prices to allow for government subsidies.

Without going into the details, the latest inflation publication revealed that electricity prices had gone up by 24.6% over the previous 12 months (from 12-monthly growths of +13.6% and -6.3% in the previous two reports) but this inflation was reportedly down -6.3% during the latest month! It doesn’t make sense.

The ABS seemingly tried to take the heat out of the inflation reports by calculating an implicit price change from a flat subsidy. As the subsidies come off, electricity price inflation and, hence, CPI inflation will be inflated for the following 12 months or more.

The ABS did report what the 24.6% electricity price inflation would have been without the subsidy effect: 5.9% for the last 12 months. We could have lived with that!

CPI inflation stands at 3.0% for the headline rate, but that would be in the middle of the 2% to 3% range without the statistical massaging!

If it were not for massive government support in the job market and economic growth, the Australian economy would be seen to be in a bit of trouble. The latest growth data support that view. The RBA should have cut on September 30th but it was probably led astray by the ABS inflation data.

In spite of the economic machinations at home and abroad, equity markets continue to make new highs or close to them. We see the momentum trend continuing.

US bond yields have settled down after the tariff debacle. However, the ‘standard’ 30-year US mortgage rate went up after the Fed’s recent rate cut – as did the 10-year Treasurys’ yield. Long interest rates are determined by the market based on confidence in future growth and inflation. There is no ‘interest rate cut to pass on’ in the US or here.