No sooner that market participants thought that economies around the world might just catch a break from Trump’s tariffs tirade and execute a nice soft landing, the reality of what has transpired this week is starting to feel like a bucket of ice water has suddenly been dumped on us. Of course, it doesn’t help that Wreck-it Ralph has returned from the relative calm of his Middle East tour to once again swinging away at its trade partners. We are now back to 50% tariffs on steel and aluminum. China apparently has upset the president by being a “tough” negotiator and the Wednesday deadline for all countries to present his highness with trade proposals seems to have come and gone. The other thing that has come and gone appears to be economic activity.

It has been just over two months since the infamous “liberation day” salvo of tariffs, but April was not expected to offer up any real tangible evidence of Trump’s policies on hard economic data. May, on the other hand, was the first full month where some of the non-rescinded policies were in place and, as I have been saying for a while now, June and July would be the litmus test in terms of how this data was going to play out.

At the time of writing, we were still waiting for the May U.S. labour force stats, but we always get a preview two days before with the ADP payrolls data. Since October, there has been a gradual downtrend in terms of net new jobs created as reported by ADP. As the below chart shows, the recent peak was 233,000 that month, which was the highest since July 2023. Last month, the number fell to only 37,000 and that is the worst we have seen since March of 2023, when it was minus 53,000. This result was not only well below the street consensus of 110,000 but it was also under the lowest estimate out there.

This same chart also shows U.S. nonfarm private payroll changes and generally these two series move in tandem, though there are numerous examples where they can also go in different directions (as with September 2022, December 2023 and, more recently, last October and December).  In April, we saw only a slight moderation in nonfarm payroll growth (+170,000 to +167,000), yet the two straight significant declines in the ADP figure suggest a catch up is going to take place. It’s important to note that private payrolls were sluggish through much of last year and slipped into negative territory back in October.

Why hasn’t the headline nonfarm payrolls number been as weak?  Well, public sector employment remained buoyant during this period. Oops, do I hear a chainsaw?? Yes, DOGE may not have delivered the $4 trillion in savings needed to let those poor conservatives in Congress sleep better at night, but there have been job cuts all the same. In other words, the buffer against private sector employment declines isn’t there.

Well, if the cracks are starting on the employment front, how are businesses feeling after a couple of months of the tariff tempest? In a word, not so enthusiastic. While the White House and its congressional followers continue to paint the current situation as a minutely painful, yet necessary step to a booming economy down the road, the fact is that this re-wiring is causing more than a minor wincing. 

This week, the Institute for Supply Management (ISM) manufacturing index fell for a 4th consecutive month to 48.5 – remaining below the breakeven level of 50. Indeed, there have only been 3 months since the fall of 2022 that the index has been above 50. As the above chart shows, the index hit a low of 46 back in 2023, but this was when economic growth was decent and really only in response to the significant back-up in interest rates in 2022-23. During the previous trade war under Trump 1.0, we saw manufacturing contract and sentiment fell to the lowest levels since the great financial crisis.

This indicator has taken on less significance over the decades as manufacturing activity represented less and less share of U.S. economic output. Which is why the results for the ISM non-manufacturing PMI garnered more attention this week.

Even though market pundits refer to this index as the “services PMI”, it is in fact the sentiment read for those industries outside of manufacturing, including sectors like agriculture and construction. It is a much broader indicator of the level of business confidence in the U.S. and that number fell to 49.9 in May – the firs dip below 50 in a year, as the above chart shows.

Earlier this week, the OECD’s latest outlook trimmed global GDP forecasts for 2025, citing weakness in trade, higher-for-longer rates, and geopolitical uncertainty. The U.S. forecast was revised down by 0.3 percentage points to 2.1%, while Europe’s growth expectations were slashed more sharply, as were Canada’s. If current tariffs are carried through into the second half of this year, the OECD predictions will likely be realized. I would argue that the organization is too optimistic on U.S. growth versus the rest of the world, but we will see.

At a minimum, the seeds have already been planted for a U.S. and global economic setback that is similar to what we saw in 2019. A couple of weeks ago I mentioned how economists had marked down the probability of an economic recession to below 40%, where it was over 50%. Watch for another revision in the weeks to come. For now, the global economy is in a more precarious state than we expected even after the November election. This is not a housing crisis and it’s not a pandemic.  Some would argue that it’s a worse situation than those two episodes, given that we really don’t know what the next headline reads.

As for the policy response in this climate, it has been mixed.  Countries outside the U.S. have adopted a more stimulative fiscal policy stance, especially in areas of infrastructure and military, and we have definitely seen that in Canada. However, central banks are not yet in alignment. This week, the European Central Bank (ECB) executed another quarter-point rate cut to bring its target rate to 2%, marking the 8th decline in the past year. India’s central bank lowered its rate half a point last night and also cut its reserve ratio by 1%. 

Yet, the Bank of Canada is taking a steady approach, opting to leave rates unchanged this week at 2.75%, even though most economists agree that Canada is extremely vulnerable if Trump maintains tariffs on Canadian exports. Case in point, we saw our trade deficit reach a record $7.1 billion in April and that didn’t even reflect the full brunt of Trump’s initiatives. This will clearly induce a sizable drag on GDP in the second quarter and that could push the BoC into resuming a downward path on rates.

It is hard to believe that June is already here, but it is equally hard to think that we still haven’t completed a full quarter since the White House unleashed its misguided tariff agenda. After Thursday’s drama between Trump and Musk, I would say the near-term path on not only U.S. trade policy, but fiscal policy is even less clear.

 On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.

Andrew Pyle