Jobs data from May could show a mostly stable economy, but economists say Trump tariffs will soon bite

The U.S. economy added 139,000 jobs in May, exceeding expectations but indicating a continued slowdown in the labor market as the unemployment rate remained steady at 4.2%; however, other recent reports, including weaker ADP data and contracting service sector activity, suggest a softening economy. Economists, like Mark Zandi, anticipate further economic deceleration due to the impact of tariffs on inflation, potentially leading to reduced hiring and eventual layoffs, while the Federal Reserve is expected to maintain elevated interest rates despite these warning signs.

Analysis

The U.S. labor market displayed further signs of deceleration in May, with nonfarm payrolls increasing by 139,000, a figure that surpassed the consensus forecast of 120,000 but marked a slowdown from April's revised 147,000 additions. While the unemployment rate held steady at a historically low 4.2%, other recent indicators point towards a broader economic softening. Notably, ADP's private payroll data registered its weakest monthly gain since March 2023, and the Institute for Supply Management's services index unexpectedly contracted for the first time in nearly a year, accompanied by decelerating hiring. Weekly jobless claims also rose to their highest level since October, with elevated continuing claims suggesting increased difficulty for the unemployed in securing new positions. Economists, such as Mark Zandi of Moody's Analytics, anticipate that forthcoming inflation readings will reflect upward pressure from import tariffs, potentially leading to a feedback loop of reduced economic activity and hiring, with BLS job data possibly falling below 100,000 in coming months. This view is supported by a Federal Reserve survey indicating widespread corporate expectations of rising costs and prices due to tariffs, and a Congressional Budget Office estimate projecting tariffs will add an average of 0.4 percentage points to inflation in 2025 and 2026. Despite these concerns and a hiring rate stagnant at 2014 levels, the Federal Reserve is expected to maintain elevated interest rates, as indicated by Andrew Husby of BNP Paribas, who stated the bar remains high for rate cuts until a more sustained economic cracking is evident.

Key Decisions for Investors

• Investors should adopt a cautious stance, recognizing the accumulating signs of economic deceleration and the potential for tariff-induced inflation to further dampen growth and consumer spending.
• Monitor upcoming inflation reports and labor market data with heightened scrutiny, as these will be critical inputs for the Federal Reserve's policy trajectory and market sentiment.
• Factor in the likelihood of sustained higher interest rates, assessing portfolio exposure to rate-sensitive sectors and considering strategies that may perform better in a slowing economic environment with persistent inflation.
• Evaluate companies for their resilience to rising input costs and their ability to manage pricing power in an environment where consumer demand may soften.