May Jobs Report Was In-Line While Inflation Continues to Trend Towards the Fed’s 2% Target
The May employment report was better than anticipated with 137,000 new jobs added to the economy, ahead of the estimated 125,000. The unemployment rate held steady at 4.2%, but the March and April reports were revised lower by a total of 95,000 jobs. Worker pay grew more than expected, with average hourly earnings up 0.4% during the month and 3.9% from a year ago. The broader U6 unemployment rate, which is often seen as a more comprehensive measure of unemployment and underemployment, was also unchanged at 7.8%. The healthcare sector accounted for nearly half the job growth (+62,000) while the federal government shed 22,000 jobs.
Source: U.S. Bureau of Labor Statistics
Prices fell more than anticipated in May with headline CPI (also known as headline inflation) rising just 0.1% month-over-month (M/M) or 2.4% year-over-year (Y/Y). Core CPI held steady at 2.8% in May. Energy prices slipped 1% in May, but food prices rose 0.3%. Shelter prices rose in May, but its 3.9% annual increase is the lowest since late 2021. The Personal Consumption Expenditures (PCE) Index rose 0.1% M/M in April or 2.1% Y/Y. Core PCE came in below expectations at an annual rate of 2.5%. Consumer spending slowed in April, posting a 0.2% increase versus the 0.7% increase in March.
PMIs, Retail Sales & Durable Goods Orders All Show Weakness
The U.S. manufacturing sector remained in contraction territory based on the May ISM Manufacturing PMI (Purchasing Managers’ Index) reading of 48.5. Most of the weakness came from the inventories, prices, and new export orders components. Most key measures are stuck in contraction territory. Consumer confidence jumped by 12.3 points in May to 98.0, its biggest increase in four years, thanks to optimism about the potential for trade deals. The ISM Services PMI fell back into contraction territory in May with a reading of 49.9 (down from 51.6 in April). Most of the weakness came from production and new orders.
U.S. retail sales growth slowed sharply in April as the boost from front-loaded purchases faded. Retail sales rose 0.1% after surging 1.7% in March as consumers increased spending in advance of proposed tariffs. Core retail sales declined 0.2% after rising 0.5% in March. Sales fell at auto dealerships and sporting goods stores but rose at online retail and bars and restaurants. Retail sales grew 5.2% Y/Y in April. New orders for durable goods plummeted in April, but beneath the headline lay a much more subdued picture. The 6.3% decline in new orders was almost entirely due to the very volatile category of commercial aircraft, which came back down to earth after surging in March. Excluding the transportation sector, orders for durable goods rose 0.2% in April. Core shipments, a key input for business investment in the calculation of GDP, declined 0.1% in April.
Eurozone & Japan Continue to Underwhelm
The eurozone flash composite PMI fell back into contraction territory in May with a reading of 49.5 versus April’s 50.4 headline figure. The services component fell to a 16-month low last month while manufacturing hit a 33-month high. Germany joined France in contraction territory for May as the remaining eurozone countries outperformed the two largest economies. Manufacturing prices fell in May, but they surged in the service sector. The European Central Bank (ECB) will likely continue with cautious rate cuts.
Japan’s GDP shrank 0.2% quarter-over-quarter (Q/Q) in Q1 2025 after growing 0.6% in Q4. This was the first quarterly contraction in a year, weighed by concerns over the impact of U.S. trade policies and weak demand from major trading partners including China. Net trade subtracted 0.8% from Q1 GDP and consumer and government spending were stagnant. Business spending was a positive contributor in Q1. Inflation in Japan held steady at 3.6% in April although core CPI jumped to a two-year high of 3.5%.
Does China Need More Stimulus? Other Key EM Countries Post Solid Economic Growth!
China’s manufacturing activity contracted in May for a second month, fueling expectations for more stimulus to support the economy amid a protracted trade war with the U.S. The official manufacturing PMI came in at 49.5 in May, up from 49.0 in April. The non-manufacturing PMI, which includes services and construction, fell to 50.3 in May from 50.4 in the prior month. China’s consumer prices dropped by 0.1% Y/Y in April 2025. This marked China’s third consecutive month of consumer deflation, as the combined effects of ongoing trade tensions with the U.S., weak domestic demand, and persistent employment uncertainty impacted consumer activity. Core inflation, which excludes volatile food and fuel prices, rose 0.5%, holding steady for the second month.
India’s economy expanded at a better-than-expected 7.4% annualized rate in Q1 2025, up from 6.4% growth in Q4 2024. The recovery pointed to traction in Indian economic growth after a period of softening, as lower food and energy prices spurred lower interest rates and investment. India also has low dependence on exports, providing insulation against global tariff threats. The annual inflation rate in India fell to 3.2% in April 2025, the lowest since July 2019. With the inflation rate sitting below the Reserve Bank of India’s 4.0% midpoint target, additional rate cuts could be on the horizon.
Taiwan’s Q1 2025 GDP surged 5.5%, up from the 3.8% rate in the previous quarter. Exports grew by 20.3% in Q1 2025, supported by strong global demand for electronic information and communication products. Trade policy uncertainty caused the government to cut its 2025 GDP forecast slightly to 3.1%. Brazil’s economy expanded by 2.9% Y/Y in Q1 2025, down from 3.6% in the previous quarter. While agriculture grew 10%, growth slowed in construction, services, household spending, and government spending.
Trouble Underneath the Hood!
Although the headline economic numbers generally portray an economy on solid footing, we have written about some disturbing trends underneath the hood, particularly with various loan delinquencies that have been trending higher. With the moratorium lifted on student loan payments, the problems have become even more exacerbated. All of this could lead to spillover effects elsewhere in the economy and a deterioration in consumer spending.
Time to Start Considering Private Real Estate?
Commercial real estate has seen a challenging few years with property prices that have on average declined by 22% from peak levels. Office, residential, and retail have seen the largest downward repricing despite Net Operating Income growth of 11%. Parts of private real estate are starting to look attractive, but high interest rates remain a headwind, and supply/dynamics differ significantly based on property type and region.
Source: AEW Capital Management
The Importance of Staying Invested!
We continually stress the importance of diversification and difficulties with timing markets. Investors often make rash decisions to exit markets when faced with geopolitical or “shock” events that have historically led to long-term underperformance versus remaining fully invested. Investors may make the correct decision to exit markets at the start of a drawdown, but they rarely make the decision to re-enter markets prior to a significant rebound. Market timing requires two decisions that are impossible to time accurately.
Sources: Bloomberg, Invesco
The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
