Capital Markets Update #23

It’s hard not to marvel at US economic resilience in the face of two of the most significant inflationary and macroeconomic nightmares ever to invade an economists’ wildest dreams. What’s worse, the referenced doubling of oil prices and imposition of a wide-ranging tariff regime hit US markets in the span of about 18 months.  However, in spite of an avalanche of dire forecasts, the US economy has thrived.  Our question is how and why?  Furthermore, what tangible takeaways can we garner from these practical, informative experiences.

‍First, US CPI has increased by 4.4% over the 14-month measurement period from March 2025 – May 2026, or a 0.3% average monthly increase.  Critically, this takes into account somewhere between a 20% - 50% positive price shock on imports due to tariffs and basically a doubling of oil prices (for a short period).  Think about that – that is absolutely wild data. 

The US economic defense against an inflationary macroeconomic impulse consists of three main balustrades.  First, we produce more at home than one might previously have imagined.  Second, US companies are exceptionally skilled at managing supply chains, particularly when the goal is to mitigate price shocks.  Finally, US government institutions have proven deft at managing, if not manipulating, markets for US economic benefit.   

Since Q1 2024, US GDP has expanded by exactly 11.0% (FRED) while the value of imports is up about 6.5% (T-24 ending 4/26, US Census).  Additionally, according to the St. Louis Fed, the goods vs services contribution mix to US GDP has remained stable over this period, with services contribution to GDP inching up from 72% in April 2024 to 73% of GDP in April 2026.  So, GDP is up 11%, US imports are up 6.5% and the domestic goods vs services mix is pretty stable.  This last point is important as it helps inform and relate the overall GDP growth rate to the value of imports.  Had the services contribution to GDP blown out, it would make sense that import expansion would not be relatable to overall GDP growth.  But that’s not the case; so, to some extent, the two growth rates are relatable.  Regardless, we’re currently importing approximately the same value of Food, Feeds and Beverages as we did during the trailing 12-month period ended April 2024.   Furthermore, the value of imported industrial supplies is down 7% over the last two years, Auto vehicle imports are down 14% and consumer goods imports are down 9% over the period.  Perhaps not surprisingly, the value of imported capital goods is up 40% in the last two years – which makes sense, that’s semiconductors.  But again, we’re generating meaningful expansion in GDP by relying much more heavily on US production to supply goods and inputs to critical “End Use Categories,” as they’re known.  Another stark example of US production ramp to solve an inflationary impulse would be oil production.  According to the IEA, US Oil production reached a record 13.9MM BPD in April 2026 and likely pushed higher in May, vs approximately 13.5MM BPD in April 2025 or 12.7MM BPD in April 2023.

We’ve written extensively about point number two in the past.  Our research supports the conclusion that US companies have proved exceptionally adept at shifting supply chains, strategically sharing tariff increases with importers, diversifying or manipulating product mix to avoid costly inputs, or simply strategically eating residual tariff costs in margin to maintain marketshare.  Our capital markets update No. 10 entitled “On Tariffs” both outlines and supports these statements. 

Finally, it’s important to recognize the role major US government institutions have played in softening the potential blow of a macroeconomic price shock on the US economy.  The most powerful of these institutions, including the Fed and Executive branch, have proven increasingly willing to manipulate markets proactively as opposed to reactively.  Yes, the executive branch created tariffs; they also proceeded to roll back punitive trade costs on critical segments to the US economy.  For instance, this writer just shipped a 1.5lb item from Italy to the US and paid $70 in shipping and $35 in tariffs, while Iphone components are largely tariff free.  Similarly, the Fed’s labor prong acts as a constant dovish put to markets, if say for instance trade policies were to limit hiring and/or put workers out of work.  The Fed’s mandate on full employment also acts as a counterweight towards the impulse to raise rates in light of a potentially “transient” inflationary shock.  It’s qualitative and highly subjective, but the labor mandate benevolently provides the Fed Chair credibility to keep rates low, often well into an inflationary period, under the auspices of maintaining a stable labor market.  Now, moral turpitude around adherence to both sides of the dual mandate proved disastrous in 2021, but potentially could have saved the bull market in 2025 / 2026.  Similarly, the US executive branch has shown its willingness to both subsidize (via various consecutive farmer bills) and deflate (via strategic sales from the US oil reserve) various commodity markets in which US producers and consumers interact.   2025 and 2026 forecast farm subsidies are expected (in aggregate) to create $75B of direct payment subsidies to Americas farmers, a 3.4x increase from the $24B of subsidies sent to farmers in 2023 and 2024.  Alternatively, as oil rose during the ongoing battle with the Iranian government, the US government signaled a willingness to release up to 172MM barrels of oil to the market, while targeting a max flow rate of about 2MM barrels per day.  Rough math will tell you we could subsidize the global oil markets at a rate of 2MM BPD for about 3 months with that haul.  That would subsidize approximately 10% of lost daily physical oil supply trapped in the Strait of Hormuz – just in US oil reserve subsidies alone.  That’s incredibly powerful. 

Our point in aggregating and emphasizing these factors is to highlight the apparent flexibility and durability of the US economy when faced with massive inflationary shocks.  Short of literally cutting off all goods supply during Covid while simultaneously sending $5T in payments and subsidies straight to consumers to over-stimulate demand, it appears there’s quite a lot the US economy can work with.  This is exceptionally important to be cognizant of as we feel the insecurity of making investment, business or life decisions during future periods of dramatic change.  These “balustrades,” as we dubbed the pillars of US economic defense against recession in the face of supply shocks, are real, powerful and appear to be somewhat enduring (depending on who is running the government).  Therefore, it’s important to account for these measures as we make future decisions during periods of economic temerity and/or change.