No, Europe isn't falling behind the USA

Hint:  No. 

From TLDR

The perils of comparing economies. And excellent insight into the problems.

 

US manufacturing picks up in January

 As usual, the line to watch is the thick green one.  

To recap:  

• The economy started to recover in late 2024, the expected response to the Fed's earlier interest rate cuts.
• But this recovery was aborted after Trump massively increased uncertainty with his tariffs
• A year later, we are seeing the first tentative signs that the recovery might have resumed.
• But note, the upward slope of the green line is much less steep than in previous recoveries

EU vs US comparison

 From a Bluesky post by Justin Parolev

Credits to @geodatarankings Source data OECD, EuroStat and CRC

Not the sort of recovery we like

 Three charts showing some time series from the US economy.

A low quit rate suggests workers have little confidence that they'll get a new job.
Low vacancies show they're right.

Jobs "hard to fill" from the NFIB small business survey
"Jobs plentiful" from the Conference Board consumer confidence survey

Consumer sentiment from the University of Michigan
Consumer confidence from the Conference Board

The US economy hits the brakes

 Here's another indicator for the USA, showing how a recovery began, but has died.

The series depicted is my own US coinciding index, which is designed to coincide with the economic cycle.   You can see how growth slowed to the trough in 2023, started to pick up in 2024, and really accelerated in late 2024 and early 2025 before sliding again.  

Again, the slowdown up to 2023 was caused by the Fed raising rates, the recovery since then was caused by the diminishing impact of the rise in rates and the increasing impact of falling rates.  And the plunge since April is due to the uncertainty and damaging effect of Trump's tariffs and other policy initiatives.

Economic growth is fizzling out

China has just released its official year-on-year industrial production growth rate for November (4.8%, down from a peak of 7.7 % in March).  November's data for US and EA (Euro Area*) industrial production are only available through October 2025.  I have a function which estimates additional month(s) of data for a time series.  It calculates the next month via three different techniques and uses the average of these three values as the forecast.  I have thus been able to estimate an average for industrial production for China, the US and the Euro Area through November.

The chart plots the 6-month rate of change at annual rates in the unweighted average.  These are the three largest economies/economic zones in the world, and allowing for Chinese overestimation of GDP, are roughly equal in size.  The 6-month rate of change is slowing for all three zones: China peaked in March 2025, and has been decelerating since; the US peaked in June this year; and the EA in April this year.

Growth for the average of the 3 is still positive, just, but the trend is down.  Note again the pattern:  an accelerating recovery in the world economy from Q4 2024, fizzling out as Trump's tariffs disrupt economies and increase uncertainty.  

How low can it go?  Well, there is the powerful (lagged) influence of falling interest rates, which should be holding the world economy up, offset by the more immediate impact of the increased uncertainty and trade reductions of the tariff war.  So we may see stagnation rather than recession.  

*EA = Euro Area/Euro Zone, i.e., the countries which have the Euro as their currency.

US PMIs: growth OK-ish, prices not.

 The latest PMI data for the USA show that the economy is still advancing, perhaps a little more slowly.

S&P Global's comment on prices suggests inflation is likely to pick up:

Input cost inflation accelerated sharply in November, hitting the fastest rate for three years barring the jump in costs seen in May. Tariffs were again the predominant reason cited by companies for increased costs, alongside reports of higher wage rates. Service sector costs rose at the fastest rate since January 2023. In contrast, manufacturing input price inflation cooled to the lowest since February but remained well above the average seen over the past three years.

My private sector index looks ..... terrible

I've updated my composite index of private sector data sources.  They now are (equal weights):

1. The whole-economy ISM index
2. The whole-economy PMI index
3. The University of Michigan consumer sentiment index
4. The Conference Board's consumer confidence index
5. The LMI logistics index
6. ADP's monthly job change
7. Challenger's monthly job losses
8. "Jobs easy to fill", from the NFIB survey (data only through September; October values out this week)
9. "Jobs are plentiful" from the Conference Board survey

I've plotted the resulting index after extreme-adjusting it, mainly to remove the massive down-spike during the Covid Crash. 

It looks more bearish than my previous index.  In fact, it looks terrible.

[Here is my first piece about my private sector data index]

For the data nerds among you, here's the chart of the index before and after extreme-adjustment:

Private sector data confirm US slowdown

Since the government isn't publishing any data, I decided to create a composite index of what time series we do have from the private sector. It is composed of the whole economy ISM and PMI indices, the University of Michigan's consumer sentiment index, the logistics managers' index, ADP job changes and Challenger job losses (inverted).

The pattern is familiar--I've talked about it before.  A nascent recovery through 2024 in response to rate cuts stops dead in its tracks when Trump starts his tariff follies, then rallies a little because the tariff effects are lagged, but starts declining again as tariffs (and deportations and welfare cuts and healthcare) really start to bite.

This indicator suggests that, at best, the economy is somewhat worse this year than last.  But if current trends continue, it will be substantially weaker over the next few months, year on year.  

Can Fed rate cuts help?  Yes, eventually.  But economies lag changes in interest rates by 12 to 18 months.  Current rate cuts won't undo the damage caused by Trump's policies until late 2026.

US inflation starts to rise

US inflation has started to rise, in consequence of the swingeing jump in tariffs.   It took a bit longer than I expected, probably because stocks (inventories) were higher than I thought.  But now that businesses have run down their pre-tariff stocks, they have no choice but to pass on their increased costs.  No doubt, as inflation gathers momentum, they will also be indulging in a bit of "greedflation", as they did in the post-covid inflation surge.   

But it's not just tariffs. The government's campaign against immigrants has meant that food prices are soaring, because immigrants pick and pack the USA's food.  (Coffee is rising because of global warming, and because of 50% tariffs on Brazilian coffee imports)

In my judgment, neither of these forces is anywhere near over.  Prices will continue to rise until equilibrium is reached, and that will be several months away.

The Fed could "look through" this surge in inflation, on the argument that it will not be a sustained jump in the inflation rate, but a one-off adjustment in price levels.  "Cost-push" rather than demand-led inflation.  That is what markets (shares, bonds and currencies) think will happen, and the next cut in rates later this month seems baked in.  

This rise in inflation will reduce real (inflation-adjusted) incomes, reducing spending, deepening the economic downturn.  This might seem to be an argument for further rate cuts, if it happens, but just as the inflation might be transitory, so would the economic downturn caused by that inflation.

Now, it is possible that wages may rise to compensate---which I do not think will happen---but if they do this will heighten Fed fears that higher inflation is becoming embedded in the system, which means they won't cut interest rates any further.

So, the Fed moves depend on data over the next few months.  If the economy continues to weaken, and wage inflation doesn't accelerate, the Fed will prolly cut the Fed Funds rate again.  If the economy stabilises, then the Fed will have the luxury of waiting for the inflation surge to slow, and it prolly won't cut rates again.  If wage inflation starts to pick up, all rate cuts are out of the question.  

I'm not at all sure what the inflation rate will peak at, but I wouldn't be surprised if it nears 5% by year-end or early in 2026.  This will be a very uncomfortable environment for the Fed to cut rates, as opposed to keeping them stable.  It will need to be quite sure that the rise in the inflation rate is transitory.  And that its moves are not seen as a response to Trump's pressure, which would destroy its credibility.

Unemployment to start rising

 From Fight for a Union

There are now more unemployed people than job openings for the first time since COVID. Buckle up. The trajectory ain’t good.

The US just handed the renewable future to China

 A video from Undecided by Matt Ferrell

Yes, it's catastrophically stupid.  It's as if, at the beginning of the jet age, the US government had banned jets and insisted on using Lockheed Constellations and DC-6s.  By the time America comes to its senses (if it ever does) China will be so far ahead, the US will never catch up.

China is becoming the world's first electrostate

 From the ABC, Australia's national broadcaster.

In April this year, China installed more solar power than Australia has in all its history. In one month.

This isn’t a story about Australia’s poor track record on solar; Australia is a global leader. Rather, this shows the astonishing rate at which China is embracing renewable technologies across every aspect of its society.

But don’t make the mistake of thinking this transformation is driven by a moral obligation to act on climate change.

China’s reasons for this are less about arresting rising temperatures than its desire to stop relying on imported fossil fuels and to fix the pollution caused by them.

The superpower has put its economic might and willpower behind renewable technologies, and by doing so, is accelerating the end of the fossil fuel era and bringing about the age of the electrostate.

“The whole modern industrial economy is built around fossil fuels. Now the whole world is moving away from that and that means that we are rebuilding our economy around emerging clean tech sectors,” said Muyi Yang, the lead China analyst at energy think tank Ember.

“Once the new direction is set, the momentum will become self-sustaining. It will make reversal impossible. I think China now has set its direction towards a clean energy future.

“Can you imagine that the Chinese government will say that, oh, we will go back to fossil car, not the electric cars? That won’t happen. That’s not possible … this momentum is becoming so strong.”

It’s hard to communicate the scale of China’s clean technology rollout but it helps to look back to recent history to appreciate the transformation.

China became the world’s factory at the end of the 20th century, manufacturing cheap, low-quality products. This industrialisation modernised the country but also caused widespread environmental damage and drastic air pollution.

The factories were powered by fossil fuels, causing China’s emissions to skyrocket and it to become the largest polluter in the world.

China overtook the United States for top place in 2006, but the US is still responsible for the most emissions historically, at one-quarter of all emissions.

 

Still, China’s pivot to renewables wasn’t just about addressing these rising emissions.

With polluted waterways and acrid city smog long ago becoming their own crises, China had to act. Part of that response, starting a decade ago, was a plan called Made in China 2025, which outlined how it would reshape its manufacturing capability to focus on high-tech products, including the ones needed to address climate change.

The authoritarian regime put the heft of the state behind clean technologies at a scale and pace difficult to imagine in most democracies.

It began to invest in all components for renewables, especially wind, solar, electric cars, and batteries that are used for both transport and energy storage. To do this, it used significant government-funded subsidies, said Ember’s Muyi Yang.

“We all understand that young sectors and technologies need some protection for them to grow. It’s like helping a baby to learn how to walk; initially, you need to support them.

“But I think the logic behind China’s policy support is always clear — this support is not meant to be pumped up indefinitely.”

When China rose to industrial dominance in the 1990s, it realised that it could maximise output by developing hubs where all parts of a supply chain for a product are built in the same region. The same approach was applied to renewables, meaning battery factories were established near car plants, as an example.

“It’s not about subsidies. It’s about sound planning, sustained commitment, and targeted support,” Yang said.

As the Made In China plan unfolded, more and more power was needed to fuel these energy-hungry factories and the lifestyles of the burgeoning middle class. To keep up, China built new coal-fired power stations, even as it was installing more wind and solar.

This “dissonance” between China’s booming renewables and coal has meant China is painted both as a climate hero and a villain.

It’s also meant that emissions kept rising.

[However,] a decade after the Made in China plan began, the country’s clean energy transformation is staggering.

“It’s a really interesting policy because it’s a 10-year plan to become a world-leading clean tech manufacturer, which they’ve outright achieved,” said Caroline Wang, the China engagement lead at the think tank Climate Energy Finance. “They’ve made themselves indispensable in the new kind of global economy.”

China is home to half of the world’s solar, half of the world’s wind power and half of the world’s electric cars.

“In the month of April alone, 45.2GW of solar was added, more than Australia’s total cumulative solar power capacity,” Caroline Wang said.

“China’s renewable capacity has exponentially increased and that has also contributed to the drop in coal, in coal use and emissions. There is now a structural kind of decline of coal.”

That’s already having an impact on emissions:

Recent analysis from Carbon Brief found the country’s emissions dropped in the first quarter of 2025 by 1.6 per cent. China produces 30 per cent of the world’s emissions, making this a critical milestone for climate action.

With its unmatched economies of scale, this dramatic acceleration has also brought down the cost of electrification across the world and made China the world leader in clean technologies. Chinese-made electric cars are becoming more dominant on Australian [and Thai, and Malaysian, And Brazilian ....] roads — something that’s already happened for the solar panels and batteries installed across Australian homes.

“China has successfully helped the rest of the world lower the bar for them to embark on the transition. This makes it easier for many other countries to jump on board,” Ember’s Muyi Yang said.

“The transition has to be affordable, otherwise it will be extremely difficult for many developing countries.”

China’s clean energy exports in 2024 alone have already shaved 1 per cent off global emissions outside of China, according to Carbon Brief, and will continue to do so for the next 30 years.

Caroline Wang points out that this green era has also brought major economic benefits.

“It drove 10 per cent of their GDP last year — just the one industry, clean energy. It’s overtaken real estate, and that says a lot because real estate was the driving force of their economy until a few years ago. But now it’s been overtaken by clean energy,” she said.

China’s renewables expansion is also striking because it could not be more different to the direction of another world superpower, the United States, under the leadership of President Donald Trump.

Casting aside the climate damage it will wreak, the US is in a position to return to its “drill, baby, drill” roots because the country produces more than enough fossil fuels to cover its own needs.

That’s not the case for China. One of the key reasons it has pivoted to electrification is to get away from its dependence on imported fossil fuels. 

“I think there’s some deep strategic thinking … it’s not only about the environmental obligation or international commitment, and it can also not be fully explained by economic benefit in terms of jobs and investment,” Yang said.

“Energy is a basic input for economic activities. Energy security is critical because it’s critical for supporting a functioning economy.”

“China sees the old, the conventional fossil fuel growth model as not sustainable. And it is becoming increasingly unable to sustain long-term prosperity.”

When the world’s economies became hooked on fossil fuels, they became dependent on the countries that could supply them, and the price of fossil fuels increasingly dictated global markets.

“This dates back to issues in the 1970s with the [oil] crisis,” said Jorrit Gosens, a fellow at the Centre for Climate and Energy Policy at the Crawford School of Public Policy at the ANU.

“That’s really when people start to think about energy security, especially when we talk about China.

“China typically is described as very rich in coal, but very poor in natural gas and oil.”

Electrification is changing that, and China — the world’s biggest oil importer — is already weaning itself off with electric cars.

“If you go to Beijing today, you can honestly stand at intersections with four lanes going every way and it’ll be quiet as a mouse. The noisiest thing coming past will be a creaky bicycle,” Dr Gosens remarked.

Last year, crude oil imports to China fell for the first time in two decades, with the exception of the recent pandemic. China is now expected to hit peak oil in 2027, according to the International Energy Agency.

This is already having an impact on projections for global oil production, as China had driven two-thirds of the growth in oil demand in the decade to 2023.

The 20th century was dominated by countries rich in fossil fuels, and many of the world’s conflicts fought over access, power and exploitation of them.

Done right, electrification could change that too, as most countries will be producing their own electricity.

“Even if you have pretty poor-quality natural resources, you can still squeeze quite a bit of electricity out of a solar panel. It’s really changing the geopolitics,” the ANU’s Dr Gosens said.

“Renewable energy is the most secure form of energy that there is because you just eliminate the need for imports.

“But also the cost of it, right? It’s a stable cost. You lock it in as soon as you build it. You know what the price of your electricity is going to be. You get insulated from both those risks if you have more renewable energy.”

For Australia, one of the world’s largest exporters of coal and gas, there is plenty to take from this, with China’s furious electrification paving the way for the rest of the world to follow.

“Even if we have these climate wars here still … we can bicker about how quickly we should transition away from fossil fuels domestically [but] the rest of the world is ultimately going to decide how much they’ll be buying of our coal, gas and iron ore,” Dr Gosens said.

“I think that’s the biggest risk — that we fail to prepare for something and that these changes will be much quicker than we currently anticipate.”

For Climate Energy Finance’s Caroline Wang, it’s in Australia’s interest to be clear-eyed about what’s happening in China.

“I think a gap in Australia and other Western countries is knowledge and understanding. China is a complex country … it’s got good and bad. For the energy transition space, which is full of complexity, there’s a real need, for our strategic national interests, for Australia to understand what is happening in China.”

Finding hope in national self-interest and security might seem strange, but for Wang, China’s transformation makes her more optimistic about the climate crisis.

“This is the world’s largest emitter, the largest population. If they’ve managed to do it in quite a short time — a decade — it’s a kind of achievement that we haven’t seen any other country achieve. And so it’s very inspiring. Seeing that on the ground gave me hope for other countries, including Australia … there are lessons there to be learned.” 

Clear evidence of US recession

I haven't commented before now on the US labour market stats which came out a week ago---I've been kept busy with changing my data sources and rewriting my programs to work with these new formats.  Plus other software improvements, as well.

First, non-agricultural employment.  Note how employment growth started to pick up in the second half of last year, and has been falling since the beginning of this year.  Employment growth is still positive, but only just.  Ignoring the Covid Crash, it hasn't been this weak since coming out of the GFC, 15 years ago.

Second, unemployment.  This comes from a different survey to the payrolls data.  The BLS gets the payrolls data by asking companies how many people they employ.   They get estimates for unemployment by asking a random sample of households whether they are employed or unemployed.

If these two different surveys, drawn from different samples populations, show the same thing, we can be more confident about what's happening.   And they do.

The unemployment rate is usually regarded as an indicator which lags the cycle, i.e., it turns up or down after the economy does.   However, its change over 6 months coincides quite well with the cycle, except it is inversely correlated---it rises when the economy falls.  So in the chart below, I have plotted the six-month change inverted.  A falling line with this indicator thus indicates a slow-down or a recession.

Observe how unemployment had started falling (shown as a rising line in the chart) in the second half of last year, showing that an economic recovery was getting underway, and how this recovery has reversed since January.

Another data series from the household survey is total employment.  Because this comes from the survey of households, not employers, it shows a slightly different picture to the payrolls chart.  But not that different.  And it also points to a very rapid slowdown in jobs since January---the largest fall since the GFC, if we exclude the Covid Crash.  Note that because the household survey draws on a smaller proportion relative to its sample population than the payrolls survey, its random month-to-month fluctuations are larger.   So I have used a six-month average change to smooth this.

Like the ISM surveys, all three charts show that a recovery in the economy had begun, and this recovery was aborted by Trump's tariff imbroglio.

I see no reason for this to change direction over the next 6 months, because we will now be seeing the inflation effect of the huge jump in tariffs.  This will reduce real incomes, and therefore expenditures.

Will the Fed cut rates to save the day?  No.  Not until it's sure that the rise in inflation from tariffs is transitory.  And even if it does, interest rate changes take many months to increase economic activity.

There will be random month-to-month zigs and zags, but I expect US economic data to worsen inexorably for the next few months.

Consumers in a funk

 This chart shows the U Michigan consumer sentiment survey, compared with the Conference  Board's consumer confidence survey.   These are independent surveys, carried out by different organisations, with differing methodologies.   The "sentiment" survey shows worse results than the "confidence" survey.  Yet both clearly point towards a slowdown at best, and a recession at worst.

Treacherous

By Morten Moreland  

[It is in reference to the "trade agreement" signed by the UK after Trump raised tariffs.  It doesn't pay to bow down to bullies]

US recession just starting

The chart shows the extreme-adjusted ISM and PMI for services and manufacturing, and their average (thick pink line).  Because the ISM and PMI surveys ask different questions, of a different sample of  the relevant populations, on different dates, their average will have a smaller random fluctuation (they are statistically independent).  In addition, extreme-adjusting the underlying series removes large "spikes", up or down.   The extreme-adjustment in April reduced the downward spike.

What is happening is perfectly clear.   The economy was starting a renewed upturn when it was hit by Trump's tariffs.  This is just the beginning, as each month of uncertainty worsens confidence and the willingness to spend or invest.   Even if Trump wishes to reverse course, confidence has been damaged, and it will take months before it's restored.  Also, the economic downturn so far, is before prices have started rising, and before retaliation by other countries.  Will the Fed cutting rates help?  It also will take time to affect confidence.

My estimate is that the risk of recession, i.e., negative GDP growth is above 80%.

It's not just tariffs and uncertainty

From MAKS 24 

The U.S. could lose up to $90 billion in 2025 as foreign tourism drops and boycotts of American goods rise, - Bloomberg 📉 March saw a 10% decline in non-citizen air arrivals, and Goldman Sachs warns this could shave 0.3% off GDP if the trend worsens.

US wind and solar now 25% of all electricity

From John Hanger

Good morning with good news: US wind & solar surge, generating 83 TWh in March 2025, up ~20% from 69 TWh in March 2024.

W&S were 24.38% of US electricity in March 2025 March W&S generation: 2025 83 TWh 2024 69 TWh 2021 52 TWh 2020 39 TWh 2015 18 TWh 4X since 2015 & 2X since 2020!

Everywhere you look, you can see wind, or solar, or wind and solar rising steadily.  In some countries, it will reach its markets share, i.e., whatever is left over after hydro and nuclear with a few years, in others it will take longer.  But we're getting there.

Record car loan delinquency

 From Barchart

Not good.  If recession bites in the US --- and that seems increasingly likely --- this indicator suggests strains on consumer spending and banks' loan books, worsening the downturn.

Note strong seasonality.
I don't have the data, so I can't seasonally adjust them for you.