Stocks Climb on Solid Jobs Numbers and Cooling Trade Tensions

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Stocks gained with the major indices finishing higher for the week thanks to a solid jobs report and a relatively quiet week of tariff news. What little news there was in trade negotiations was viewed as mostly positive, with President Trump and Chinese leader Xi Jinping participating in a phone call and Trump agreeing to visit China at some point in the future. While no details of a trade agreement emerged from the discussion, investors viewed the conversation as a welcomed de-escalation of tensions with China, which began to build shortly after the two countries agreed to a truce in early May to their ever-escalating tariffs. Optimism about the thawing of relations with China offset the doubling to 50 percent levies on all steel and aluminum imported into the U.S. that took place in the middle of the week. The increased tariffs were announced the prior week after the Court of International Trade struck down the tariffs implemented under the International Emergency Economic Powers Act (IEEPA). The ruling was later temporarily halted by an appeals court.

With tensions easing and the courts now beginning to weigh in on the legality of some of the proposed levies, many investors have begun to believe peak tariff uncertainty has passed. That belief, coupled with the resiliency of hard economic data, has led many to conclude that risks to the economy are beginning to recede. Indeed, last week’s headline number from the Bureau of Labor Statistics Nonfarm payroll report was viewed as a sign that the economy has so far been left unscathed by tariffs.

While it may turn out that some of the president’s other economic policies, including lower taxes and loosening regulations, may provide an offsetting tailwind to tariffs (which are largely viewed as being a drag on the economy), we think it is too early to conclude that economic risks have begun to ease. As we’ve noted in previous commentaries, surveys, or so-called “soft data,” of businesses and consumers have been flashing warning signs for the past few months. While the weakness highlighted in those reports has not yet shown up in hard data in a meaningful way, we believe it is too early to conclude that it won’t eventually have an impact. Recent hard data has been volatile as businesses and consumers adjust their actions in anticipation of how trade policy will eventually play out. Simply put, some of the strong hard data we’ve seen in recent months likely was affected by purchases and business investments that were made to get in front of expected rising prices driven by tariffs.

Similarly, while we don’t expect future tariff developments to yield the level of surprise that the initial announcement of the reciprocal levies did in early April, we believe there are more twists and turns to come in trade negotiations and that the administration will not stray from its goal of using tariffs to recast the global economy and the role of the U.S. in it. Our caution should not be mistaken for pessimism. Instead, we believe that until trade negotiations are finalized and the economy has operated under the new more restrictive trade policies for a prolonged period, it will be difficult to gauge the ultimate net impact of the administration's policies. For that reason, we expect the Federal Reserve will take a wait-and-see approach when it comes to rate decisions as it seeks to avoid acting too soon before the full impact of the president’s efforts to remake the global economy are known. Unfortunately, that means that current high interest rates will continue to be a headwind for some parts of the economy.

Despite these challenges and the unpredictable nature of current trade negotiations, we do not believe investors should make dramatic changes to their investment plans. Instead, the current environment serves as a valuable reminder that an unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long terms. And capitalizing on these unforeseen opportunities is best done through diversification.

Wall Street wrap

Hiring stronger than expected: Last week’s Nonfarm payroll report from the Bureau of Labor Statistics (BLS) showed stronger than expected growth, with 139,000 new jobs added in May, including 140,000 positions added in private industry. Digging into the details, however, shows that the job market, while solid overall, may be simply treading water. Of the new jobs captured by the Nonfarm data, 87,000 were in private education and health services, which are typically unaffected by the economy. Meanwhile, manufacturing, which is sensitive to the economy, saw 8,000 positions lost. The diffusion index (which measures the portion of the 250 industries covered by the report that added jobs versus those in which employment is unchanged or declining) declined to 50 percent in May versus April’s revised level of 51.8percent. Interestingly, the diffusion index for manufacturing jobs, which covers 72 industries, fell to just 41.7 percent from April’s reading of 44.4 percent. Finally, job gains for the prior two months were revised downward by 95,000.

Hourly pay for non-supervisory production employees grew by 0.39 percent for the month and was up 4 percent year over year. The annual pace of wage growth continues to slow but is still above the 3 to 3.5 percent rate the Fed believes is consistent with its goal of inflation sustainably at 2 percent.

The BLS’s other jobs report, the Household survey, painted a different picture. While the unemployment rate was unchanged at 4.2 percent, the report showed 696,000 fewer people employed in May than in April. The unemployment rate held steady because the labor participation rate declined to 62.4 percent from 62.6 percent. The result of the lower participation rate was a decline of 625,000 in the size of the civilian workforce.

More on the employment picture: Announced job cuts in May totaled 93,816, up 47 percent from the same month a year ago, according to the latest report from Challenger, Gray & Christmas Outplacement Services. Cuts in the government sector drove the increase, but reductions in payrolls occurred in many sectors. In total, just more than 696,300 job cuts have been announced since the beginning of the year, which is the highest total for the first five months of the year since 2020, during COVID. For further context, announced job cuts year to date through May are up 80 percent from the 385,859 announced through the first five months of 2024.

Despite the surge in job cuts since the beginning of the year, there has also been an uptick in hiring, although announced hires are well short of announced job cuts. Through the first five months of this year, companies announced plans to hire 79,741 people, an increase of 57 percent from year-ago levels. While up from last year, the total is low in historical terms and in line with 2012 and 2013, when companies were cautious about hiring following the Great Financial Crisis.

Finally, initial jobless claims were 247,000, an increase of 8,000 from the prior week’s final figure. The four-week rolling average of new jobless claims came in at 235,000, up 4,500 from the previous week’s average.

Continuing claims (those people remaining on unemployment benefits) stand at 1.904 million, down 3,000 from the previous week’s revised total. The four-week rolling average of continuing claims came in at 1.895 million, an increase of 8,000 from last week and the most since late November 2021. As we’ve noted in prior commentaries, we believe continuing claims are a more reliable indicator of the labor market, as they measure workers who are facing long-term challenges in finding a job and, as such, filter out some of the temporary noise that can be found in initial claims data.

Manufacturing contracts further in the face of uncertainty: The latest data from the Institute of Supply Management shows that the manufacturing sector contracted for the third consecutive month. This marks the 29th time in the past 31 months that growth in the sector has declined. The composite reading for the index for April came in at 48.5, down 0.2 points from the previous month (readings below 50 signal contraction). Readings for new orders moved higher to 47.6, up from the prior month’s 47.2 but still at contractionary levels. Of the six largest manufacturing groups, just two (petroleum and coal products, and machinery) saw an uptick in orders. This marks the fourth consecutive month of shrinking demand.

The production index rose 1.4 points to 45.4 but remains in contractionary territory. The weak production reading suggests companies are slowing production in response to economic uncertainty. The employment index came in at 46.8, up 0.3 points from April. It’s worth noting that comments made by survey participants indicate that payroll cuts are accelerating as companies grapple with uncertainty about demand in the near and mid-terms. Additionally, companies primarily turned to layoffs to shrink headcount as opposed to simply not filling positions as employees left payrolls. Layoffs are a quicker way to trim payrolls in the face of weaker demand. Weaker growth was once again attributed to business climate uncertainty, with approximately 75 percent of comments taking a dim view of the future. Included in comments submitted with the survey by one of the respondents was this note: “Government spending cuts or delays, as well as tariffs, are raising hell with businesses. No one is willing to take on inventory risk.”

Tariffs also continued to drive price pressures for manufacturers. Prices declined slightly, with the latest reading coming in at 69.4, down 0.4 points from April, but remaining elevated. For further context, the price index has risen 15 points over the past six months. The six largest manufacturing industries reported rising prices for the month, and 45 percent of all companies reported higher costs, down from 49 percent in March.

Services sector contracts: The latest data from the Institute for Supply Management showed that the services sector dipped into contraction in May with a headline reading of 49.9 (readings below 50 signal contraction), down from April’s final reading of 51.6. This marks just the fourth time in the past 60 months that the composite reading was in contractionary territory. Strength narrowed during the month, with 10 of 18 industries reporting growth, down slightly from 11 of 18 in March. New orders tumbled to 46.4, down 5.9 points from the prior month’s reading of 52.3. Prices continued to climb, with the latest reading coming in at 68.7, up from 65.1 in April. The latest figure marks the sixth consecutive month that the input price index has been above 60 percent. The price index is now at the highest level since November 2022. Increased price pressures were widespread, with 16 of 18 industries reporting higher costs and no industries seeing price decreases.

The latest results from the survey showed that the employment index rose to 50.7, up 1.7 points from April’s final reading and just barely in expansion. Seven of 18 industries reported growth in employment, while seven recorded declines in payrolls; the remaining four saw little or no change in hiring.

Beige book shows slowing economic activity: The latest release of the Federal Reserve’s Beige Book, which provides real-time anecdotal assessments of business conditions across the country, shows that the pace of the economy slowed slightly from the previous report released in April. Six of 12 districts reported slight to moderate declines in economic activity, three noted little change, and three districts reported slight growth. Employment on balance was little changed, with most districts reporting little or no changes to payrolls, two districts reporting slight declines and three districts reporting slight increases in hiring. All districts surveyed reported a decline in demand for workers, which showed up in fewer hours worked, less overtime, holds on hiring and plans to reduce payrolls. Despite the weakening demand for workers, a few districts noted that the higher cost of living was putting upward pressure on wages. This bears watching, as it could evolve into a wage-price spiral as was seen throughout the 1970s and into the early 1980s. The lack of movement in the employment picture reflects uncertainty about the direction of the economy; all districts reported elevated economic and policy uncertainty, which was weighing on decisions by businesses and consumers.

While the latest report showed weakening economic activity, most districts reported modest to moderate growth in costs, with several noting that the rise in costs was outstripping the rise in prices charged to customers. This suggests that for now, some companies have been able to absorb cost increases or lack pricing power. Should this continue, it could lead to pressure on profit margins. The contacts in the majority of districts expect tariffs will cause input costs to rise for their businesses.

The week ahead

Tuesday: The National Federation of Independent Businesses Small Business Optimism Index readings for May will be out before the opening bell. Last month’s report showed that companies’ profit margins remain low by historic standards, and sales are weak. We will watch to see if the fluid nature of tariff discussions continues to sow concerns among business owners.

Wednesday: The Consumer Price Index report from the BLS will be the big report for the week. Recent inflation readings have been muted. We will be digging into the data to see if last month’s slower pace continued or if reports of higher costs for some businesses, which have been reported in recent survey data, have translated to higher prices for consumers.

Thursday: The latest readings from the BLS on its Producer Price Index will offer a look at changes in costs for buyers of finished goods for March. We will be watching to see if input costs continue to creep higher, which could put pressure on profit margins or slow the pace of disinflation.

Friday: The University of Michigan will release its preliminary report on June consumer sentiment and inflation expectations. Consumer sentiment has tumbled in recent months as inflation expectations have turned higher in response to concerns about tariffs. We will be watching to see if the trend continues or if there are signs that those concerns are having an effect on attitudes toward purchases in the months ahead.

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