Weekly Economic & Business Outlook

Getting Ahead of the Tariffs

This week, markets will receive another update on inflation through the May Consumer Price Index (CPI) report, which is widely expected to begin reflecting pressure from tariffs, especially on core goods. While any reversal of recent disinflationary gains would be unwelcome, current levels of price growth are so close to the Federal Reserve’s target that Wednesday’s bump could elongate an already lengthy final decent. The boost to inflation in May is likely to be small for two reasons: 1. Stockpiling by businesses ahead of the Liberation Day tariffs should enable them to hold off on price hikes until later this summer when their inventories begin to see greater depletion, and 2. The U.S. has rescinded some of its more extreme duties including the 145% tariff on Chinese products and the 25% tariff on United Kingdom products.

It is unclear whether May’s inflation will be purely “cost-push” driven by companies marking up their prices or include some “demand-pull” driven by consumers also seeking to get ahead of the tariffs. That will be important as the Fed is likely to hold on interest rates in June, choosing to wait for a clearer picture on trade negotiations and the ability of the economy to withstand pressure from tariffs. If inflation is purely cost-push, then the Fed may lower interest rates to ease constraints on consumption and sustain economic activity. But if inflation exhibits some demand-pull, then the Fed might choose to hold on interest rates even further, assuming that the consumer remains healthy enough to stomach the pressure. But May is just the beginning—the Fed will be looking at data over the next several months to get a better sense of the tariffs, which means that any relief on borrowing costs is likely months away.

Small Businesses See Labor Market Continuing to Weaken

This year has not brought the economic growth many had hoped for, as uncertainty around tariffs and persistent high interest rates continue to be headwinds. While on paper the labor market has remained stable with positive job growth continuing from month-to-month, survey data from the National Federation of Independent Business reveals a flagging appetite for hiring at least among small businesses.

The NFIB April Small Business Economic Trends survey revealed that 34% of small business owners had job openings they could not fill in May, on par with the level in April, and a low not seen since January 2021. The construction, transportation, and manufacturing sectors led the way with more companies in those fields reporting openings, however businesses in nearly all sectors (except for retail and agriculture) reported fewer openings than in May 2024.

Looking ahead, a net 12% of small business owners expect to create jobs in the next three months, down one point from April and well below the heights reached in 2022.

Data from Automatic Data Processing Inc. (ADP) confirms declining hiring at smaller firms, as it shows jobs at firms with 49 or fewer employees fell by 13,000 from April to May. Interestingly, ADP also found job losses at the largest firms, with growth in jobs limited to firms with 50 to 249 workers (+51,000). These data underscore the challenging market that staffing firms currently face. In an uncertain environment, companies are hesitant to hire. However, staffing firms should keep their eyes on two major opportunities for economic growth: further progress on trade deals or passage of the Big Beautiful spending bill could ease uncertainty and spark hiring.