Good morning. President Donald Trump’s Big Beautiful Bill became his large lovely law on Friday. The law creates dubious debt dynamics: it is expected to add between $3tn and $4tn to federal deficits over the next decade (Dun dun dun!). The market moved moderately in response: the 10-year Treasury yield rose 10 basis points just after the bill passed. Email us: unhedged@ft.com.
The economy
Way back on Thursday, the June jobs report came in stronger than expected: 147,000 new jobs were added and the unemployment rate ticked down to 4.1 per cent from 4.2 per cent. Expectations for Fed rate cuts, as tracked by the futures market, responded: Traders are now expecting two rate cuts by the end of the year, versus three before. Odds of a July cut plunged to less than 5 per cent from 24 per cent.
Look a bit more closely at the jobs numbers, though, and the picture is more one of continuity than strength. Labor force participation inched down, sustaining a recent pattern. More importantly, job growth in June was driven by government jobs and healthcare, while cyclical industries had a notably poor showing.
Monthly job data is noisy; it’s best to look at rolling averages. Start with a basket of cyclical industries (construction, manufacturing, leisure and hospitality, transportation and temporary help). Temporary help and manufacturing have been quite weak but are on a bit of an uptrend now. Hospitality, transportation, and construction are all positive but softening. Summing them all up (the dark brown line below), there is a notable recent slowdown — but only when compared to the jump in activity in the late fall and spring. The current level of job growth (about 20,000 jobs a month) is quite consistent with the past few years.
On the non-cyclical side, things are not so different. The federal government workforce is shrinking this year, for reasons that are familiar to all; state and local government is creeping up; healthcare is flat. The aggregate (in mid-blue below) shows, if anything, a gentle recent downtrend.
All of this is consistent with what we know from the other main economic indicators. It fits with the quite low levels of hiring, firing and quitting, and with the fact that the recently unemployed are starting to have a harder time finding new jobs. Corporate profits are still growing respectably but less quickly than they were a year or two ago. Both the Atlanta Fed’s GDPNow tracker and economist consensus have second-quarter GDP growing at about 2 per cent, which is probably a bit above the economy’s long-term potential.
The economy appears, in sum, to be solid but quite static except for a gentle slowing trend. The next test? Second-quarter earnings season. The big banks kick things off next week.
(Kim)
Clean energy and the budget
Both the Senate and the House versions of the budget bill ended long-standing tax subsidies for manufacturing renewable energy components — solar panels, wind turbines, batteries and so on — and for investing in renewable energy projects. The House version of the bill did so abruptly. The Senate version, now the law of the land, is gradual: if construction commences in 2026, projects qualify for the full tax credit, and manufacturing incentives stay on the books until 2028.
Renewable stocks fell after the House bill passed, and fell again in mid-June when it looked like the Senate would add an extra tax on renewables. But most renewable stocks perked up when the Senate bill passed as written and again after the House approved the Senate version. Many of the stocks are now above where they were at the start of the new Trump administration:
The companies focused on residential projects, such as SolarEdge, have had a particularly large lift. The Senate version of the bill wedged in provisions that made it easier for residential projects to qualify for the tax credit, says Joseph Osha at Guggenheim partners. Many had expected those provisions would be killed by the House; they weren’t.
There are some dark clouds, however. First, it is unclear if new renewables projects can meet the 2027 deadline. “There is almost no way for most new projects to be connected to the grid [by then],” said Glenn Schwartz of Rapidian Energy. “The interconnection queue is years long [in some places], and [the companies] will face many other permitting obstacles.” The longer timeline will mostly help projects that were already under way.
Next, the bill withholds tax credits from manufacturers and installers whose supply chains are too dependent on China. While the Biden administration made a big push on domestic manufacturing, the US industry still has a lot of China exposure, and it is unclear how well government can monitor the industry. “We have concerns about companies’ ability to demonstrate their compliance, and this is uncharted territory [for the government]; they would need to figure out how to implement this law”, says Ben King at Rhodium Group.
The uncertainty comes at a bad time for the US economy — and the environment. The US is facing record demand for electricity, driven by AI data centres. According to Jesse Jenkins at the Ardlinger Center for Energy and Environment at Princeton University, most US electricity generation comes from natural gas, and that supply network is at maximum capacity:
The slack in the system can only come from two places: build more wind, solar, and batteries, or we will have to lean more heavily on our less efficient, dirtier power plants. What we will see under this bill is less wind and solar, more expensive wind and solar, and more reliance on existing, less efficient generators, which also means higher costs and higher emissions.
Jenkins estimates that the average cost of energy for households will go up by $160 by 2030 and $280 by 2035 under the bill.
It is not certain, however, that renewable investment will slow. Most analysts expect it will, but some are sanguine. “The industry does not want to admit it publicly, but most industrial scale projects can operate without subsidies . . . People will make less money, but the notion that solar will immediately go to zero when the credits go away is incorrect,” argues Osha. If there is energy demand that can only be met by renewables and the projects are profitable, as Osha argues, they will be built.
It’s hard to imagine a future energy grid without more renewables supply, for many reasons. The budget bill creates a barrier to that. We hope it is surmountable.
(Reiter)
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