Slowly gathering headwinds are causing the economy to lose steam as it heads into the second half of the year.
Total change in employment of 44,000 in the May jobs report, along with information from the Fed’s Beige Book and the ISM purchasing managers’ indexes for services and manufacturing, all point to a soft underbelly of the American economy caused by new tariffs and rising prices.
A look at the Institute for Supply Management’s economy-weighted PMI against real gross domestic product by expenditures implies that the risk of a move toward flat growth are rising. That outlook aligns well with our forecast that overall growth with slow to 0.7% this year with a 40% probability of a recession over the next 12 months.
We have consistently made the case that the adverse impact of tariff policy would begin to show up in the data this summer. Although that impact was only a trickle in the May data, it will become a deluge starting in June through September.
The consumer price index, to be released on Wednesday, will provide further evidence of trade-induced damage as the monthly core rate of inflation will increase by 0.3% or close to it.
While the top-line CPI will benefit from falling gasoline prices, the core will experience pricing pressure from the goods sector. Excluding new and used autos, that core rate posted its largest increases in over a year in April and again in May.
Read more of RSM’s insights on the economy and the middle market.
Market participants over the past two months have reduced expectations of rate cuts through the end of the year. As of Friday, the market has priced in only a 54% probability of a rate cut in September, 47.9% in October and 59.7% in December.
While growth is moderating, the risks to the economic outlook because of inflation will keep the Fed in check, which means no rate cuts at the June 18 or July 30 meetings.
Neither investors nor other policymakers should anticipate a summer reduction in the federal funds policy rate as the central bank awaits further evidence of the economic impact caused by significant trade policy changes.
