Data Blackout and Tariff Turmoil: Why the U.S. Economy Could Be Headed for a Correction

Fed’s balancing act and the labour‑market dilemma

Federal Reserve Chair Jerome Powell addressed the National Association for Business Economics conference on 14 October. He noted that while real activity has been stronger than expected, the labour market is mired in “low‑hiring, low‑firing” doldrums. The economy may be on a somewhat firmer trajectory than policymakers expected, but job creation remains minimal and the central bank will take a meeting‑by‑meeting approach to rate cuts. Powell acknowledged the tension between robust consumer spending and soft job growth and said the Fed needs to see how this plays out. The government shutdown has delayed official statistics, but he said available public and private data provide adequate insight ahead of the late‑October meeting.

Powell emphasised there is no risk‑free path for policy: the Fed must balance its 2 % inflation target against the risk of a labour‑market collapse. He noted that both layoffs and hiring remain low and that households’ perceptions of job availability and firms’ hiring difficulties continue to decline. Elevated inflation, he said, largely reflects tariffs rather than broader price pressures.

Conflicting forces: tariffs, immigration and artificial intelligence

Economists at the conference underscored the competing forces at work in the U.S. economy. Gregory Daco, chief economist at EY‑Parthenon, said growth is being constrained by tariffs and reduced immigration even as a wave of investment in artificial intelligence (AI) offsets some of those drags. Fed officials are split between those worried that inflation will stay above target and those concerned that job growth is sliding quickly. Fed Governor Christopher Waller warned that the contradiction between near‑4 % GDP estimates for the third quarter and reports of negative job growth cannot persist—either the labour market will rebound or output will slow.

Private indicators point to weak hiring even though the unemployment rate (last reported at 4.3 %) remains near full employment. Economists surveyed by NABE expect inflation to remain around 2.5 % to 3.3 % through 2026 as tariff costs are passed on to consumers. Philadelphia Fed President Anna Paulson cautioned that growth rests on “a relatively narrow base,” driven by AI investment and spending by higher‑income consumers; many business contacts are unsure where future demand will come from.

Data darkness and global unease

The U.S. government shutdown has switched off the flow of official statistics, raising alarms among foreign policymakers. Officials in Japan and elsewhere worry that being left “data‑blind” could complicate their own policymaking at a time when they monitor the U.S. economy to forecast currency and trade prospects. Bank of Japan Governor Kazuo Ueda called the situation a “serious problem” and said the BOJ hopes the data flow is restored soon. One Japanese official even joked that the Fed’s data‑dependent policy is ironic when “there’s no data to depend upon.” In the United Kingdom, Bank of England policymaker Catherine Mann cautioned that questions over U.S. data and central‑bank independence are like “termites” eroding the dollar’s standing.

The shutdown has become a focus at the International Monetary Fund and World Bank meetings in Washington. Beyond the absence of data, global leaders are debating President Donald Trump’s efforts to remake trade policy and gain influence over the Federal Reserve. The IMF’s latest World Economic Outlook warns that intensifying political pressure on institutions responsible for data collection could undermine trust and increase the chance of policy mistakes. Disruptions to data quality and timeliness can erode markets’ and policymakers’ ability to make informed decisions, raising the risk of errors. While private and central‑bank surveys offer some insight, analysts note that uncertainties compound over time, heightening the risk of missteps.

IMF warns of a potential market correction

The IMF’s semi‑annual Global Financial Stability Report sounded the alarm on overpriced risk assets and geopolitical tensions. The global lender said investors have grown too complacent about risks—from trade wars and geopolitical strife to yawning fiscal deficits—and that asset valuations now appear well above fundamentals, increasing the chances of a “disorderly” correction. U.S. President Trump’s recent threats to raise tariffs on China stoked a sell‑off in U.S. stocks and tumbled bitcoin.

Markets have been buoyed since April—when the latest round of tariffs began—by expectations of global monetary easing, but the IMF warns that this optimism masks the damage from tariffs and high debt levels. Valuation models show risk‑asset prices far above fundamentals, raising fears of a sudden, sharp correction, especially given the concentration of gains in AI‑related mega‑cap stocks. The IMF argues that central banks should remain vigilant about tariff‑driven inflation and avoid excessive easing that could fuel asset bubbles.

The report also notes that widening fiscal deficits could push bond yields sharply higher, straining bank balance sheets and mutual funds. Interconnectedness between banks and the lightly regulated nonbank sector creates contagion risk; about 10 % of U.S. banks and 30 % of European banks would experience a significant hit to capital if nonbanks drew down their credit lines. The IMF urges regulators to monitor crypto assets and adopt comprehensive frameworks to address emerging vulnerabilities.

Market volatility and trade tensions

Investor anxiety increased on 14 October as U.S.‑China trade tensions flared. The Cboe Volatility Index (VIX) jumped to 22.94—its highest level since May—before retreating to around 19.7 as stocks whipsawed. A VIX reading above 20 signals strong demand for options protection; the surge reflected investors “waking up” to risks after months of calm. Markets had fallen sharply on Friday when the S&P 500 tumbled 2.7 %, its biggest drop in six months, and on Tuesday stocks initially fell another 1.5 % before rebounding after Powell indicated the Fed might soon end its balance‑sheet runoff.

Traders scrambled to buy protection, with some using put spreads on S&P 500 and Nasdaq‑100 ETFs to hedge near‑term risk. However, the flat VIX futures curve suggests investors expect this bout of volatility to be short‑lived. Portfolio managers note that they are taking advantage of the jump in volatility to sell options while keeping some hedges in place.

Corporate highlight: LVMH surprises with growth

In corporate news, French luxury conglomerate LVMH reported a 1 % rise in third‑quarter sales, its first growth this year. Investors greeted the improvement with enthusiasm, driving the company’s shares almost 8 % higher on Germany’s Tradegate platform. The world’s largest luxury group had struggled this year amid weak Chinese demand, making the modest sales uptick significant. LVMH’s rally contrasts with broader market volatility and highlights the uneven impact of geopolitical and economic headwinds across sectors.

Takeaway

Today’s economic news underscores the tension between resilient output and a softening labour market in the United States. Fed Chair Powell signalled patience, emphasising that policy will be tuned meeting by meeting as officials weigh tariff‑driven inflation against a sluggish job market. Outside the U.S., policymakers fretted over the lack of American data and the risks posed by political pressure on economic institutions. The IMF’s latest report reinforced warnings about inflated asset prices and a potential market correction, while Wall Street’s fear gauge spiked on renewed trade tensions before settling back. Amid the turbulence, selective bright spots—like LVMH’s surprise sales growth—offer a reminder that economic narratives are rarely uniform.