Mixed Signals Weigh on US Outlook
The US economy is showing signs of a slowdown as ongoing trade policy uncertainty continues to weigh on growth prospects. Several indicators released this week suggest that economic softness could persist in the months ahead.
Private-sector job creation slowed sharply in May, with the ADP report showing just 37k positions added, well below the forecast of 114k. This marks the weakest monthly reading in over two years, raising concerns that the economy’s strong start to the year may be losing momentum. The slowdown was broad-based, with goods-producing industries shedding a net 2k jobs, as job losses in manufacturing and natural resources offset gains in construction.
The traditionally resilient services sector also showed signs of strain. Key areas such as professional services, healthcare, education, and transportation reported reduced activity. While the ISM Services employment component rose to 50.7, it appears employers are taking a more cautious stance. One hiring manager noted that “higher scrutiny is being placed on all jobs that need to be filled, whether it be a new position or backfill.”
Adding to concerns, the overall ISM Services Index unexpectedly fell into contraction territory, dropping to 49.9 in May from 51.6 in April. This reading represents not just a monthly setback but a concerning trend that suggests consumer and business demand is weakening across the board.
The Fed's latest Beige Book reinforces this narrative, describing a “slight” decline in economic activity over the past six weeks. All 12 Federal Reserve districts reported elevated economic and policy uncertainty, which appears to be influencing hiring, investment, and broader decision-making.
The report suggests that labour market conditions remain relatively steady overall, though seven districts characterised employment as “flat,” with reports of reduced hours, hiring pauses, and preliminary staff reduction planning. So far, layoffs have been limited to specific sectors.
Meanwhile, inflationary pressures are adding complexity. While current price increases are described as moderate in the report, expectations for future rises are growing. Tariff-related cost increases are now a common theme, with more businesses planning to pass costs on to consumers or absorb them through reduced margins and temporary surcharges.
The slowdown is not evenly spread. The Northeast, including cities like New York and Boston, is particularly affected, with notable increases in input costs. While some regions, such as Chicago and Atlanta, report relatively stable conditions, the broader trend suggests moderating growth.
In light of these developments, there are increasing calls for a shift in monetary policy, with Trump urging the Fed to cut interest rates. Whether such action will be enough remains uncertain, as the convergence of trade tensions, upside inflation, and employment weakness points to a more sustained economic deceleration.
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