Weekly Update 06/06/2025: US Employment Report Shows U.S. Economy Remains Resilient
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Domestic Economic News
Stocks got a lift in early trading Friday as the US employment report came in better than expected. After the weak private sector report issued by SGK core holding ADP earlier in the week, traders had feared the numbers would come in weaker than expected. US job growth did moderate in May, and the prior months were revised lower, indicating employers are cautious about growth prospects as they weigh the administration’s economic policy. Nonfarm payrolls increased 139,000 last month after a combined 95,000 in downward revisions to the prior two months, according to Bureau of Labor Statistics data out Friday. But the unemployment rate held steady at 4.2%, and wage growth actually accelerated. The payrolls figure, which as mentioned was better than expected, helped alleviate concerns of a rapid deterioration in labor demand as companies contend with higher costs related to tariffs and prospects of slower economic activity. President Donald Trump’s decision to pause some of the more punitive import duties, including those on China, has helped lift sentiment among businesses as well as consumers. “Employers have been ‘hoarding labor’ in the face of massive corrosive uncertainty,” Carl Weinberg, chief economist at High Frequency Economics, said in a note. “It costs money to fire workers, and we believe firms have been reluctant to lay off workers until they saw the extent of the Trump tariffs.” Treasury yields rose, the S&P 500 opened higher and the dollar appreciated as traders trimmed bets the Federal Reserve will lower interest rates this year.
US job openings unexpectedly rose in April in a fairly broad advance and hiring picked up, indicating demand for workers remains healthy despite heightened economic uncertainty. Available positions increased to 7.39 million from a revised 7.20 million reading in March, according to Bureau of Labor Statistics data published Tuesday. The median estimate in a Bloomberg survey of economists called for 7.10 million openings. The advance in openings was driven by private-sector industries such as professional and business services as well as health care and social assistance. While state and local education led to a decline in overall government openings, vacancies in federal government rose. The data can be very choppy, swinging by sometimes as much as 500,000 vacancies in either direction from month to month. Economists see value in looking at the report from an overall trend, which shows openings have mostly stabilized between 7 million and 8 million for the past year. The rise in job openings, along with steady hiring and low unemployment, support the Federal Reserve’s assertion that the job market is in a good place. However, it’s taking longer for those who are out of a job to find work, and economists expect the labor market to weaken more notably in coming months under the weight of President Donald Trump’s tariffs. So far, that hasn’t shown up in the data yet, supporting the Fed’s posture to keep interest rates steady for now. Hiring advanced to the highest level in nearly a year, according to the JOLTS report. However, the number of layoffs climbed to the highest since October, and fewer people voluntarily quit their jobs, suggesting people are less confident in their ability to find a new position. The number of vacancies per unemployed worker, a ratio Fed officials watch closely as a proxy for the balance between labor demand and supply, held at 1.0, in line with pre-pandemic levels. At its peak in 2022, the ratio was 2 to 1. Some economists have questioned the validity of the JOLTS data, in part due to the survey’s low response rate and heavy revisions. A similar index by job-posting site Indeed, which is reported on a daily basis, showed openings declined in April.
Applications for US unemployment benefits unexpectedly rose last week to the highest since October, adding to recent signs that the jobs market is cooling. Initial claims increased by 8,000 to 247,000 in the week ended May 31, a period that included the Memorial Day holiday. The median forecast in a Bloomberg survey of economists called for 235,000 applications. Weekly claims tend to be volatile and fluctuate even more around holidays. However, recent data and surveys pointed to a slowdown in economic activity and sustained gains in benefit filings in the coming weeks could be a sign that layoffs are on the rise. The four-week moving average of new applications, a metric that helps smooth out volatility, rose to 235,000, the highest since October. Continuing claims, a proxy for the number of people receiving benefits, fell slightly to 1.9 million in the previous week, according to Labor Department data released Thursday.
Activity at US service providers slipped into contraction territory last month for the first time in nearly a year on an abrupt pullback in demand, while prices accelerated as higher tariffs reverberated across the economy. The Institute for Supply Management’s index of services dropped 1.7 points in May to 49.9, the group said Wednesday. Readings below 50 indicate contraction, and the latest figure was weaker than all but two projections in a Bloomberg survey of economists. The steepest contraction in new orders and the highest prices-paid index since late 2022 illustrate a more pronounced impact on demand and inflation as a result of higher US duties on imports. The overall index “is not indicative of a severe contraction, but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists,” Steve Miller, chair of the ISM survey committee, said in a statement. “Respondents continued to report difficulty in forecasting and planning due to longer-term tariff uncertainty and frequently cited efforts to delay or minimize ordering until impacts become clearer.” A measure of bookings slumped 5.9 points, the most since June 2024, to 46.4. The group’s measure of business activity, which parallels the ISM’s factory output gauge, indicated stagnation — sliding 3.7 points to 50, the weakest reading in five years. Order backlogs also shrank, with a gauge falling to the lowest level since August 2023. Eight services industries reported a contraction last month, including retail trade, construction and transportation and warehousing. Ten reported growth, led by accommodation and food services. In addition to the weakening in demand, service providers experienced higher costs. The prices-paid index jumped to 68.7, the highest level since November 2022. While service providers reported a decline in stockpiles last month, a measure of inventory sentiment increased nearly 7 points to 62.9 — the highest since July. That indicates more companies see inventories as remaining too high, which risks weighing on manufacturing in coming months. Combined with data earlier this week showing a third month of shrinking manufacturing activity, the services survey suggests the economy is slowing in the wake of higher US duties and retaliatory tariffs by other countries. Both ISM indexes of exports and imports showed contraction as companies contend with the repercussions of the Trump administration’s fluid trade policy.
On that note, US factory activity contracted in May for a fourth consecutive month, and a gauge of imports fell to a 16-year low as firms pulled back in the face of higher tariffs. The Institute for Supply Management’s manufacturing index edged down 0.2-point last month to 48.5, according to data released Monday. Readings below 50 indicate contraction. Two of the report's trade-related indexes highlighted the widespread uncertainty caused by the uneven rollout and frequent changes in tariffs. The ISM's import measure dropped 7.2 points, one of the largest monthly slides on record, to 39.9. That marked a departure from earlier this year when some firms were importing more to get ahead of tariffs. The gauge of exports fell to the lowest level in five years, possibly a reflection of retaliatory tariffs from other nations on US producers. The confusion over evolving trade policy is also making it difficult on supply managers to efficiently source goods and materials. The ISM's supplier deliveries index climbed to the highest level since June 2022, indicating extended delivery times. The report also showed the fallout on demand from higher duties. Bookings contracted for a fourth month, and order backlogs shrank at the slowest pace since September 2022. Government figures last week showed consumer spending barely rose in April after the weakest quarter in nearly two years. Some companies are also pausing investment plans due to the uncertainty surrounding the frantic implementation of additional tariffs. The survey also indicated higher materials costs remain an issue for producers. The group’s price measure was little changed at a still elevated 69.4.
US President Donald Trump and Chinese President Xi Jinping on Thursday agreed to further trade talks aimed at resolving disputes over tariffs and supplies of rare earth minerals at the heart of tensions between the world’s two largest economies. Trump acknowledged Thursday the trade relationship with China had gotten “a little off track” but said now “we’re in very good shape with China and the trade deal.” Additional negotiations, Trump said, would occur “shortly” at “a location to be determined.” US Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and Trade Representative Jamieson Greer will represent Trump at the talks. “This is very complex stuff, and we straightened it out,” Trump told reporters in the Oval Office. “We were straightening out some of the points, having to do mostly with rare earth magnets and some other things.” The call generated some hope on Wall Street for lower duties between the trading partners, though investors’ optimism was limited. US equities remained little changed Thursday afternoon after an earlier advance following the leaders’ call. “The 90-minute call between Trump and Xi appears to have importantly broken the impasse on critical minerals and other immediate concerns to pave the way for trade talks,” said Wendy Cutler, a former senior US trade negotiator now at the Asia Society Policy Institute.
Interest Rate Insight and the Fed
Bond traders priced in an earlier start to expected Federal Reserve interest-rate cuts on fresh clues the US job market is losing momentum. They anticipate the Fed will lower rates as soon as September, versus October previously, while continuing to fully price in at least one additional quarter-point cut by year-end. The unexpected increase in new jobless claims sparked the repricing of swap contracts tied to Fed policy shifts. The US Treasury market rallied in tandem, following its biggest daily advance in two months on Wednesday, also in response to a weak job-market indicator. “The economy is slowing,” Krishna Memani, chief investment officer for Lafayette College, said on Bloomberg Television. “The hard data is softening. There is a substantial trend for slowing in the economy” that “gives the Fed the path to cut rates, not today, but in the later half of the year.” The decline in swap rates and Treasury yields stalled as US stock index futures rallied after reports US President Donald Trump and Chinese President Xi Jinping held their first official phone call since Trump took office in January. Trade tensions between the world’s two largest economies have caused bouts of risk aversion and capital flows from stocks into bonds. Also, short-term German yields jumped to a two-week high after European Central Bank President Christine Lagarde suggested it was possible that the central bank may revise its growth forecast higher in the future. The two-year Treasury yield, most sensitive to Fed policy expectations, was back to little changed after falling as much as four basis points, while long-maturity tenors held small gains. As measured by the Bloomberg Treasury Index, Wednesday’s gain — sparked by a sub-par gauge of private-sector job growth — was the biggest since April 3. Futures open-interest data released after the close indicated new long positions were set, and the 10-year note contract’s price reached a level that was likely to cause shorts to cover, interest-rate strategists at Citigroup said.
Federal Reserve Governor Christopher Waller said he continues to see a path to interest-rate cuts later this year amid his expectations that tariffs will boost unemployment and temporarily increase inflation. Waller said tariffs will raise inflation in the “coming months,” but he supports looking through any near-term rise in price growth when setting policy as long as inflation expectations remain anchored. “Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2% goal, and that the labor market remains solid, I would be supporting ‘good news’ rate cuts later this year,” Waller said in remarks prepared for a Bank of Korea conference in Seoul on Monday. Waller referenced a speech he gave in mid-April, in which he outlined two scenarios for how trade policy may unfold. His “large-tariff” scenario assumed an average trade-weighted tariff on goods of 25% that remained in place for “some time.” The “smaller-tariff” scenario assumed a 10% average tariff, and that higher country and sector-specific duties would be negotiated lower over time. In both scenarios, Waller expects the impact of tariffs on inflation would be temporary. He also anticipates the levies will cause an increase in the unemployment rate that will “probably linger.” That said, job cuts would likely be “modest,” he said, under the smaller-tariff option. “Reported progress on trade negotiations since that speech leaves my base case somewhere in between these two scenarios,” Waller said. He now estimates a 15% trade-weighted tariff on goods imports.
When it comes to judging the impact of tariffs on inflation, standard economic models are straightforward: this should be a one-time increase in prices. But the uncertain and fluid rollout of the Trump administration's tariffs is making the situation more complex and less clear-cut than textbooks might suggest, Atlanta Federal Reserve President Raphael Bostic told reporters Tuesday. "The textbook notion about tariffs is that... the tariffs get applied once, and everybody understands what they are," said Bostic. "That's not the environment we've had over the last several months, and so there's a question about how people will respond-to take on board a rollout that extends over a protracted period of time." Bostic said his main concern is how this prolonged, incremental rollout could influence business and consumer behavior. If firms and households start expecting continuous tariff adjustments, that could lead to more persistent inflationary pressures. “When you have a discussion about something that happens week after week, month after month, it has the potential to create a psychological response," he said. That dynamic is making it much harder to declare with any conviction that price increases from tariffs will be a one-time event. "We don't know where this is going to end right now, and so I am not going to land firmly or squarely on one side or another," Bostic said. "I'm just keeping my eyes open."
Impactful International News
The European Central Bank is coming to the end of its campaign of interest-rate cuts following its eighth reduction in a year, according to President Christine Lagarde. With the euro-zone economy suffering repeated blows from US tariffs, the deposit rate was lowered by a quarter-point to 2% on Thursday — as predicted by all analysts in a Bloomberg survey. The ECB described inflation as “currently at around” its 2% target. “We are getting to the end of a monetary-policy cycle that was responding to compounded shocks — including Covid, the illegitimate war in Ukraine and the energy crisis,” President Christine Lagarde told reporters in Frankfurt. “At the current level of interest rates, we believe that we are in a good position to navigate the uncertain conditions that will be coming up.” Money markets trimmed wagers on additional rate cuts, with another quarter-point move no longer seen as a certainty. Short-dated bonds led a drop, sending the German two-year yield up six basis points to 1.86%, a two-week high. The euro rose 0.6% to $1.1486 as the dollar sold off against most Group-of-10 peers. Economists polled before the ECB’s decision had expected rates to stay on hold in July before a final cut in September. By denting confidence in the US and clouding global growth, President Donald Trump’s levies have strengthened the euro and brought energy costs down. While that’s speeding the retreat in inflation, some now fret that prices will undershoot the target — at least before Brussels hits back on tariffs and Europe ramps up military and infrastructure spending.
Data this week showed inflation eased to 1.9% in May — falling below 2% for the first time in eight months and only the second since 2021. The slowdown was driven by softer gains in service-sector prices, a key concern for policymakers until recently. Wage growth has also cooled, underpinning assumptions that pay gains will moderate after catching up to inflation and help the ECB achieve its aim of price stability. At the same time, anxiety about the economy has risen. The realization that trade policies can shift drastically and with no warning has stifled investment and delayed household spending. A gauge of private-sector activity in the euro area barely grew last month, coming in just above the threshold separating expansion from contraction. Most European Union exports currently face a 10% levy in the US, though that risks rising to 50% in July if negotiations fail. The relationship between Washington and Beijing also remains uncertain even after both sides lowered their duties from prohibitive levels. Trade will feature among the top subjects for discussion when German Chancellor Friedrich Merz meets Trump later Thursday in the White House. A likely source of discord in the months ahead is how to assess inflation risks down the line. Higher military expenditure — a topic NATO defense ministers are also debating Thursday — is seen by hawks like Executive Board member Isabel Schnabel as a possible upward driver of prices, alongside demographics and more fragmented supply chains.
China’s services activity expanded at a faster pace in May, a private survey showed, in a sign the consumer economy is stabilizing while higher US tariffs threaten demand for exports. The Caixin China services purchasing managers’ index rose to 51.1 from 50.7 the previous month, according to a statement from Caixin and S&P Global on Thursday, slightly higher than forecast. The gauge has been above the 50 mark that separates growth from contraction for 29 months. Employment in services grew while deflationary pressure persisted, with the rate of discounting reaching the steepest in eight months. And even as confidence among businesses strengthened from April, it remained below average, according to the report. “Both supply and demand grew at a slightly faster clip as businesses sought to acquire new clients,” Wang Zhe, senior economist at Caixin Insight Group, said in the statement. “However, foreign demand took a hit from the global trade conflict, with new export business declining for the first time this year.” China’s trade truce with the US has yet to turn around sentiment in an economy reeling from Donald Trump’s tariffs.
China’s manufacturing sector had its worst slump since September 2022, according to a private survey, as higher tariffs took a toll on smaller exporters despite a truce in the trade war with the US. The Caixin manufacturing purchasing managers’ index fell to 48.3 in May from 50.4 in the prior month, according to a statement released by Caixin and S&P Global on Tuesday, well below the 50 mark separating expansion from contraction. The figure was below every estimate in a Bloomberg survey of analysts, whose median was 50.7. The results, based on a poll conducted May 12-21, were far weaker than the official PMI reading released Saturday, which showed manufacturing contracted less thanks to the reprieve on tariffs. The National Bureau of Statistics typically conducts its surveys between the 22nd and 25th of every month. The timing differences may have contributed to the discrepancy in the two data sets, according to economists at Goldman Sachs Group Inc., since China and the US reached an agreement on May 12 to reduce tariffs for 90 days. “Technical factors” in the survey, such as a smaller sample and different methodology for seasonal adjustments, may also help explain why it deviated from the official PMI, according to Bloomberg Economics. The two surveys cover different pool sizes, locations and business types, with the private one focusing on small and medium-sized firms in the non-state sector. The trade war started by President Donald Trump is rippling through industries across Asia and beyond, as US duties and trade uncertainty erode demand. Vietnam, Indonesia, Taiwan, Japan and South Korea all suffered a contraction in manufacturing activity last month — a downturn caused in large part by a drop in new export orders and production. US factory activity shrank in May for a third consecutive month. “Manufacturing supply and demand declined, dragged by overseas demand,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement. “The downward pressure on the economy has significantly intensified compared to preceding periods.”
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