US services shrink on tariff uncertainty, weak hiring prompts Trump Fed pressure
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The news: US services activity unexpectedly contracted and private hiring slowed sharply in May, sending the dollar lower and prompting Donald Trump to renew calls for interest rate cuts.
The numbers: The ISM nonmanufacturing PMI dropped to 49.9, the first contraction since June 2024 and its lowest in nearly a year. Economists polled by Reuters had forecast a rise to 52.0.
An ADP report showed private payrolls rose by just 37,000, compared with 110,000 expected by economists in a Reuters poll.
Tariff-related uncertainty and higher input costs pushed the ISM’s prices-paid index to 68.7, the highest since November 2022.
The dollar fell after the weaker-than-expected services and payrolls data, while Treasury yields declined and the S&P 500 pared gains.
The context: The ADP figures are viewed with scepticism by economists due to past inaccuracies. That data also comes ahead of Friday’s more detailed employment data from the Labor Department’s Bureau of Labor Statistics, where economists expect private payrolls to have increased by 120,000 jobs in May after advancing by 167,000 in April, according to Reuters. Overall nonfarm payrolls are expected at 130,000 jobs, with a steady unemployment rate of 4.2%
The data also follows vacancies data showing the ratio of job openings to unemployed persons held steady at about 1 in April.
What they said: "As usual, we suggest ignoring the message from the ADP employment report, mostly because it has had a very poor track record in recent years," said Oliver Allen, senior US economist at Pantheon Macroeconomics.
Trump responded to the ADP data by criticising Federal Reserve Chair Jerome Powell and demanding lower rates, contrasting the Fed’s stance with the European Central Bank, which has cut rates nine times.
“ADP NUMBER OUT!!! “Too Late” Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES!” he posted.
Macquarie FX & rates strategist Thierry Wizman said: “We think that the Fed will lean toward a more 'dovish' message on June 17 than it did on May 7, and the prospect for a rate cut in 2025 has strengthened a bit."
ING chief international economist said: “Very weak ISM service sector data and a soft jobs number from the ADP indicate that the corporate sector remains concerned about the economic environment despite the recent de-escalation in some of the trade tensions. Until there is clarity on the trading envirtonment it appears that the business sector will remain wary of putting money to work.”
The sources: ISM Services PMI, ADP National Employment Report, Reuters
