May is shaping up to a challenging month for reading the macro tea leaves in an effort to gauge how tariffs are affecting the US economy. Tomorrow’s payrolls report from the Labor Department may provide clarity. Meanwhile, the early profile for last month is a study in contrasts.
Let’s start with the good news, based on the Atlanta Fed’s current nowcast (as of June 2) for the upcoming second-quarter report on GDP.
The bank’s GDPNow model points to a sizzling rebound in growth for the April-through-June quarter: +4.6% vs. -0.2% reported for Q1. That’s an extraordinarily strong gain and so it will be useful to see if it holds up in today’s revision.
One reason to be cautious on expecting a blowout increase: the New York Fed’s current nowcast (May 30) indicates a much softer, albeit still-solid rebound for Q2: +2.4%.
Another reason for reserving judgment: yesterday’s surprisingly weak ISM Services Index report for May. The crucial services sector slipped to a slight contraction last month. The index dropped to 49.4 last month, just below the neutral 50 mark, easing to the lowest level since June 2024.
A competing survey of the services sector for last month paints a brighter profile via the S&P Global US Services PMI, which posted a firmer pace of moderate growth in May. “That said, the improvements come from a low base, following a very gloomy April, which saw growth nearly stall as confidence sank to a two-and-half year low,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
S&P Global’s US Composite PMI, a GDP proxy, also shows a pickup in business activity last month. This index accelerated sharply after April’s 19-month low, despite weakness in the manufacturing sector.
The ADP Employment Report for May, by comparison, is ringing a warning bell. This estimate shows that hiring at US companies slowed to a crawl last month. Payrolls rose just 37,000 last month, far below expectations and the lowest increase since March 2023. “After a strong start to the year, hiring is losing momentum,” said Nela Richardson, chief economist for ADP.
ADP’s track record for anticipating the official payrolls data from the Labor Department is mixed, at best, and so it’s debatable if the weak print is a reliable warning sign for the labor market. “There is no correlation between the ADP and BLS employment report,” points out Advisor Perspectives.
Economists are expecting a downshift in private-sector hiring in tomorrow’s report from the government. The consensus forecast (via Econoday.com) indicates that companies hired 123,000 workers last month. That’s down from 167,000, but the slowdown is less worrisome than the virtual collapse indicated by the ADP report.
The margin for error is thin in the current climate. Perhaps the only clarity at the moment is that a much weaker-than-expected payrolls report from the government tomorrow will confirm the worst fears about the blowback from a global trade war.