Key events this week; US CPI & PPI May
Recap from last week: Policy Impacts
We are at an early point in the policy cycle where significant new policy changes are beginning to be reflected in US economic performance. Our focus remains on tracking shifts in the US economy’s progress, mindful of the potential for higher inflation, slower growth, and distortions stemming primarily from evolving policy. This past week provided two important updates. The first was the May US labor market update, crucial for understanding the outlook for household spending. The second was an update on business activity and sentiment, examining how private sector firms are faring amid ongoing uncertainty and disruptions surrounding the new tariff regime.
US labor market data for May was mixed. Across payrolls and the household survey, there was not a sharp deterioration, but certainly some cooling in conditions. Other labor market reports indicated warning signs still on the horizon.
US non-farm payroll growth came in close to expectations at +139k in May, with a notable downward revision of -95k for the prior two months. The 12-month average slowed to +144k – the slowest of this cycle. While payroll growth slowed, the details this month still seem to mostly reflect a lack of hiring, rather than active retrenchment or layoffs.
The industry view of payroll growth suggests that policy-led initiatives may be having an impact. This is primarily evident in the split between govt and private payrolls. The growth in govt payrolls has slowed to an average of zero since Feb 2025 (DOGE cuts) – down from the average of 38k/month during 2024. This has affected the overall growth in non-farm payrolls since Feb. Importantly, total private payroll growth remained at +140k in May – just above the 2024 average growth of +130k. Annual growth in private payrolls has remained fairly steady around +1.1% since Aug 2024, but this is still the lowest of the current cycle.
Within the private sector, it’s more unclear the degree to which policy-led changes are beginning to impact payroll growth. In most cases, tariffs are likely to exacerbate existing pockets of weakness – especially in manufacturing and construction. Importantly, private payrolls are still growing on a year ago basis across most industries, with annual declines recorded in only three industries – manufacturing, professional and business services, and information.
In May, manufacturing (-8k) and professional & business services (-18k) recorded the only substantial falls in payrolls for the month (of >1k). The weakness in manufacturing payrolls has been in place for almost two years – with payrolls declining on an annual basis since Oct 23 – led by durable goods industries – indicating other factors at play. However, tariff disruptions may exacerbate this trend in the short term.
Two other key industries have recorded slowing payroll growth. Construction payrolls have slowed more notably since Oct 2024 and will likely be exacerbated by tariffs, but also impacted by interest rates. Trade and transportation payroll growth has slowed over the last 3 months – possibly more aligned with the new tariff regime.
Payroll growth in only three industries (narrow breadth) more than offset these falls this month; private health & education, leisure & hospitality (especially in the last 3 months), and the recovery in financials – all contributing a combined +148k payroll increase in May, which was most of the increase in private payrolls.
The household survey showed a notable fall in the number of persons employed in May – almost matched by a fall in the size of the labor force, as persons left the labor force. This still resulted in a small increase in the unemployment rate from 4.18% to 4.24%. The flows to unemployment were more concerning with a larger flow from “employed” to “unemployed” (equal high for this part of the cycle), plus a further increase in persons remaining in unemployment from the prior month. The growth in hours worked remained steady over the month.
Other labor market reports suggest that further labor market weakness may still be on the horizon. The JOLTS report for Apr (lags by a month) did indicate some emerging weakness in layoffs, but hiring still increased. Initial jobless claims remained elevated – and continuing claims remained unchanged at 1.9m suggesting that weakness in hiring is persisting. The Challenger Job Cut Announcements remained elevated in May and there was a notable shift in the leading reason for job cuts; from DOGE actions to ‘market/economic conditions’ and ‘closing’. The Fed Beige Book highlighted “widespread” comments of delayed hiring plans due to uncertainty, with all districts noting lower labor demand and declining hours and over-time. Reports of layoffs were still not pervasive.
The important point for the labor market outlook right now is how firms are faring amidst policy changes, disruptions, and still elevated uncertainty. The latest surveys still reflect the current tariff environment contributing to a more cautious and subdued economic backdrop. Surveys from manufacturing and services firms this month showed a continued slowing in demand, though no severe contraction, as firms grapple with the challenges of navigating uncertainty, rising prices, and supply disruptions. US-based surveys for May showed a consistent theme across both manufacturing and services sectors – and that was the impact of tariffs on prices. From the S&P US Services PMI;
“Alongside sluggish economic growth, the survey is also signaling intensifying inflationary pressures. Rising costs in the service sector were again blamed widely on tariffs, which were in turn passed on to customers to result in the steepest rise in average prices charged since August 2022.” Source: S&P US Services PMI – May
The latest Fed Beige Book reflected a similar sentiment. There were more widespread reports of firms expecting prices to increase at a faster pace going forward and “more widespread reports of declining economic activity” at the end of May. All Districts reported elevated levels of economic and policy uncertainty, leading to a cautious approach to business and household decisions.
Finally, retail sales of motor vehicles for May showed a further unwind of front-loaded demand from Mar and Apr. Motor vehicle sales slowed again in May to 16.1m annualized – with the pullback only slowing to the 2024 average at this stage. But this will still drag on retail sales and spending reports in the short term. The current Atlanta Fed GDP Nowcast shows US growth for Q2 remains elevated at +3.8% – but due mostly to the favorable unwind of the growth in imports in Mar. The contribution from personal spending has continued to edge lower.
Central bank decisions last week also continued to reflect uncertainty over the impacts of tariff policy. The ECB cut rates as expected with inflation now judged to be settling around its 2% medium-term target. The decision reinforced the high degree of uncertainty surrounding the economic outlook due to trade and tariff policies, which is expected to lead to weaker growth for the remainder of the year. The BoC remained on hold, noting a softer, but not sharply weaker economy. The decision noted a “clear consensus to hold policy unchanged as we gain more information”.
Outlook for the week ahead; US CPI & PPI for May
The economic effects of tariffs are likely to be interconnected, influencing firms’ profitability through price pass-through decisions, inflation, consumer spending, and the labor market outlook. The scale of these effects is highly uncertain. Following last week’s insights into the US labor market and firm activity and sentiment, this week’s attention turns to US inflation data. With inflation reports remaining favorable over the past few months, the CPI & PPI reports for May are set to track any tariff-related effects.
It’s the blackout period ahead of the FOMC meeting next week, so there will be no Fed speeches this week.
Key factors & events to watch this week;
US CPI is expected to firm slightly in May;
- Headline CPI is expected to increase by +0.2% over the month in May, the same as in Apr.
- Headline inflation is expected to increase to +2.5% in May, up from +2.3% in Apr.
- Core CPI is expected to increase to +0.3% in May, up from +0.2% in Apr. Core inflation is expected to increase to +2.9% over the year in May, up from +2.8% in Apr.
US PPI is also expected to firm and will be important for the PCE view of inflation for the FOMC next week.
- Headline PPI is expected to increase by +0.2% in May after falling -0.5% in Apr. Headline PPI is expected to increase by +2.6% over the year in May, up from +2.4% in Apr.
- Core PPI is expected to increase by +0.3% in May, up from a -0.4% fall in Apr. Core PPI is expected to increase by +3% over the year in May, from +3.1% in Apr.
Chinese trade data for May will also provide further insight into tariff impacts on activity.
- Export growth over the year was expected to slow from +8.1% in Apr to +5% in May (actual was lower than expected at +4.8% – so Chinese export growth slowed notably in May).
- Imports were expected to fall slightly by -0.9% in May, from -0.2% in Apr. Actual imports fell by -3.4% in May – more than expected.
This week, the US Treasury will auction and/or settle approx. $456bn in ST Bills, Notes, and Bonds, raising approx. $14bn in new money.
QT this week: Approx $10.9bn of ST Bills, Notes, and Bonds will mature on the Fed balance sheet and will be reinvested. Approx $0.4bn in Notes and Bonds will mature on the Fed balance sheet and be redeemed.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
