Unadorned Notes: February 13-17, 2025
U.S. Retail Sales Decline Sharply; U.S. Wholesale Inflation Remains Elevated; China Eyes Auto Industry Consolidation; Trump Moves to Reduce Federal Workforce; Trump Defends Proposed Reciprocal Tariffs
Economics, Finance, and Business
U.S. Retail Sales Decline Sharply: U.S. retail sales fell 0.9% in January 2025, marking the largest decline since March 2023, as adverse weather conditions and cautious consumer sentiment dampened spending. The drop followed a 0.7% increase in December 2024 and was broad-based, with notable declines in auto sales, furniture, clothing, and online shopping. Economists attributed the slowdown to frigid temperatures, preemptive tariff-related purchases in prior months, and growing concerns over inflation. Core retail sales, which exclude volatile categories, also declined 0.8%, raising concerns about consumer spending trends. Despite the setback, labor market resilience and high household wealth continue to support economic growth.1
U.S. Jobless Claims Fall Slightly: Initial U.S. unemployment claims decreased by 7,000 to 213,000 for the week ending February 8, 2025, indicating a stable labor market. Claims have remained low this year, reflecting historically low layoffs, which supports ongoing economic expansion. Despite fewer layoffs, job opportunities for those unemployed are not as plentiful as in previous years, with businesses taking a cautious approach. The number of people receiving continued unemployment benefits also fell by 36,000 to 1.85 million. Economists note that the Federal Reserve is likely to keep interest rates steady as the labor market remains resilient, despite challenges in specific sectors.2
U.S. Wholesale Inflation Remains Elevated: The U.S. Producer Price Index (PPI) rose 0.4% in January 2025 and 3.5% year-over-year, matching December 2024’s upwardly revised rate and signaling persistent inflationary pressures. The increase was driven by higher food and energy costs, including a 44% surge in wholesale egg prices and a 10.4% rise in diesel fuel. Core PPI, which excludes volatile food and energy prices, eased slightly to a 0.3% monthly gain and 3.6% annual increase. Economists warn that elevated producer costs could translate into higher consumer prices in the coming months, particularly in essential goods. The data reinforces expectations that the Federal Reserve will maintain current interest rates, as inflation remains a concern.3
U.S. Business Inventories Decline: U.S. business inventories fell 0.2% in December 2024, marking the first decline since March 2024, as strong domestic demand reduced stockpiles. Retail inventories dropped 0.4%, with motor vehicle inventories down 1.1%, while wholesale inventories declined 0.5%. Inventories rose 2.0% year-over-year but were a major drag on fourth-quarter GDP growth, which slowed to a 2.3% annualized rate. Business sales increased 0.8% in December 2024, reducing the inventory-to-sales ratio to 1.35 months from 1.37 in November 2024. The decline in inventories reflects strong consumer demand but may weigh on economic growth in early 2024.4
U.S. Equity Funds See Outflows: U.S. investors withdrew $2.25 billion from equity funds for the second consecutive week through February 12, 2025, driven by inflation concerns, weaker economic data, and uncertainty over President Donald Trump’s reciprocal tariffs. Mid-cap funds saw the largest outflows at $1.14 billion, while investors also divested from small-cap and sectoral funds, particularly in consumer discretionary and healthcare. In contrast, U.S. bond funds attracted $7.45 billion in inflows, marking a sixth straight week of net purchases, with strong demand for short-to-intermediate investment-grade funds. Money market funds saw a marginal $134 million outflow after a significant $39.06 billion inflow the previous week. The Federal Reserve’s cautious stance on interest rate cuts has further influenced investor sentiment, shifting preferences toward fixed-income assets.5
Chinese Exporters Face Rising Competition: Chinese manufacturers are increasingly targeting Asian, African, and Latin American markets to offset U.S. tariffs, leading to heightened competition and shrinking profit margins. The shift comes as U.S. President Donald Trump’s latest 10% tariff hike adds pressure on Chinese exporters, who collectively sell over $400 billion in goods annually to the United States. However, no other market matches U.S. consumption power, raising concerns that price wars could lead to deflationary pressures, job losses, and wage cuts. Some governments, including those in the European Union and India, have responded by imposing new trade barriers on Chinese products. Economists suggest China must boost domestic demand to mitigate trade frictions and reduce its dependence on foreign markets.6
Xi Seemingly Reassures Private Sector Leaders: Chinese leader Xi Jinping met with business leaders, including Alibaba founder Jack Ma, to affirm that government policies toward the private sector would remain unchanged. Xi emphasized that while private businesses would be legally protected, they must operate within the country’s socialist legal framework. The meeting followed years of regulatory crackdowns, particularly on the tech industry, which led to fines and restructuring for firms like Alibaba and Ant Group. Despite initial state media reports omitting Ma’s name, later coverage acknowledged his presence. Xi encouraged private enterprises to contribute to China’s “common prosperity” initiative, with Alibaba and Tencent previously pledging billions toward the effort.7
China Eyes Auto Industry Consolidation: Global automakers are delaying their shift to electric vehicles (EVs) due to slowing sales and infrastructure challenges, but China continues its rapid transition. Chinese EV manufacturers, such as BYD, are outperforming legacy automakers like Dongfeng, which saw a 10% drop in passenger car sales in 2024. The country's auto industry remains fragmented, with over 100 manufacturers, prompting speculation of government-led consolidation. State-owned automakers, including Dongfeng and Changan Auto, have signaled potential restructuring, driving investor optimism. Beijing has historically intervened to consolidate industries, a move that could strengthen state-backed EV makers and reshape China’s auto sector.8
U.S. Politics, Policies, and Geopolitics
Senate Confirms Gabbard and Kennedy: The Senate confirmed Tulsi Gabbard as Director of National Intelligence and Robert F. Kennedy Jr. as Health and Human Services Secretary, despite bipartisan concerns over their records. Gabbard faced scrutiny over her stance on surveillance laws, foreign policy, and past meetings with controversial leaders but secured confirmation with a 52-48 vote. Kennedy, a longtime critic of vaccines, also faced intense questioning on public health policy and Medicare but ultimately gained Senate approval. Republican Senate leader Mitch McConnell opposed both nominations, citing concerns over their qualifications and policy positions. The confirmations highlight President Donald Trump’s influence over Senate Republicans, securing approval for his most contentious Cabinet picks.910
DOJ Resignations Over Adams Case: Six senior Justice Department officials, including Manhattan U.S. Attorney Danielle Sassoon, resigned after refusing an order to drop corruption charges against New York City Mayor Eric Adams. Deputy Attorney General Emil Bove, a former defense lawyer for President Donald Trump, ordered the dismissal, citing concerns over “weaponization” of the justice system. Sassoon argued the charges were legally justified and that dismissing them for political reasons undermined prosecutorial integrity. The resignations have drawn comparisons to past political interference in the Justice Department, including the “Saturday Night Massacre” during the Nixon administration.11
Trump Moves to Reduce Federal Workforce: President Donald Trump has initiated efforts to reduce the federal workforce through executive orders and restructuring measures. The U.S. civilian federal workforce, excluding military and postal workers, consists of approximately 2.4 million employees, with over 80% located outside Washington, D.C. Federal workers have strong job protections, established through laws like the Pendleton Civil Service Act of 1883 and the Civil Service Reform Act of 1978, making large-scale dismissals difficult. Unions representing federal employees can negotiate working conditions but cannot bargain over salaries or strike. Public opinion on reducing federal jobs is mixed, with more Americans opposing mass cuts than supporting them.12
Slater Pledges Big Tech Oversight: Gail Slater, President Donald Trump’s nominee to lead the Justice Department’s Antitrust Division, emphasized the importance of resources in pursuing major litigation against tech giants like Apple and Google. During her Senate confirmation hearing, she committed to continuing bipartisan enforcement efforts against alleged monopolistic practices. The DOJ has ongoing cases against multiple firms, including Google for online advertising dominance and Apple for anticompetitive behavior. Senator Cory Booker expressed concerns that efforts to reduce the federal workforce could weaken antitrust enforcement. Slater, a former FTC official and tech industry adviser, pledged to advocate for adequate resources to uphold competition laws.13
Trump Defends Proposed Reciprocal Tariffs: President Donald Trump defended his proposal for reciprocal tariffs, arguing that the policy would create a fairer trade system for American workers. The memorandum, signed last Thursday, allows for a review process to impose tariffs on countries that levy higher duties on U.S. goods or engage in discriminatory trade practices. Trump directed key officials, including the Secretaries of State, Commerce, and Treasury, to implement measures ensuring trade reciprocity. While the tariffs are not immediately in effect, White House officials indicated they could be enacted within months. The announcement has introduced market uncertainty, though the delay in implementation has been viewed favorably by investors.14
U.S.-India Set $500B Trade Goal: Indian Prime Minister Narendra Modi and U.S. President Donald Trump announced a target to double bilateral trade to $500 billion by 2030 and pledged to finalize a trade agreement soon. Talks will focus on reducing tariffs, strengthening supply chains for strategic minerals, and expanding cooperation in artificial intelligence and semiconductors. Trump emphasized the need for a level playing field and introduced a reciprocal tariff policy to match India’s trade barriers. Modi confirmed India’s commitment to lowering tariffs on U.S. goods as part of broader economic cooperation. The discussions mark a significant step in deepening U.S.-India trade and defense ties in the Asia-Pacific region.15
Taiwan to Address U.S. Chip Concerns: Taiwanese President Lai Ching-te pledged to engage with the United States on semiconductor industry concerns and to increase investment and trade with the country. The commitment follows U.S. President Donald Trump’s remarks about restoring domestic chip manufacturing and Taiwan’s role in the sector. Taiwan Semiconductor Manufacturing Company (TSMC) is already investing $65 billion in U.S. facilities, and officials indicated support for further expansion if feasible. Lai also emphasized Taiwan’s defense commitments, proposing to raise military spending from 2.5% to 3% of GDP amid ongoing tensions with China. While Taiwan remains the largest trade surplus holder with the U.S., its government faces domestic political challenges over budget allocations.16
U.S., Russia Hold Ukraine Peace Talks: Top U.S. officials, including Secretary of State Marco Rubio, met with Saudi Crown Prince Mohammed bin Salman ahead of high-level talks with Russian Foreign Minister Sergei Lavrov on the Ukraine war. The Riyadh meeting signals a shift in U.S. strategy, as President Donald Trump seeks direct negotiations with Russia to end the conflict. European leaders have expressed concerns over Washington’s approach, as Kyiv remains excluded from initial discussions. The Kremlin has emphasized restoring diplomatic ties with the U.S. but insists on retaining occupied Ukrainian territory. The talks could lay the groundwork for a future Trump-Putin summit and a potential realignment of U.S.-Russia relations.17